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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark one)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2001

or

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 0-12798

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CHIRON CORPORATION(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

94-2754624(I.R.S. Employer Identification No.)4560 Horton Street, Emeryville, California(Address of principal executive offices)

94608(Zip code)


(510) 655-8730(Registrant's telephone number, including area code)

Not Applicable(Former name, former address and former fiscal year, if changed since last report)

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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /x/  No / /

Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

|                              |  |                              
|----------------------------- |  | -----------------------------
|Title of Class                |  | Outstanding at April 30, 2001
|Common Stock, $0.01 par value |  | 189,873,993                  

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CHIRON CORPORATION  TABLE OF CONTENTS

|                              |                                                                                               | Page No.                                                                                                                
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------
|PART I. FINANCIAL INFORMATION |                                                                                               |                                                                                                                         
|                              | ITEM 1. Financial Statements                                                                  |                                                                                                                         
|                              |                                                                                               | Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 (Unaudited)                            
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 (Unaudited)          
|                              |                                                                                               | Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2001 and 2000 (Unaudited)
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 (Unaudited)          
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                        
|                              | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations |                                                                                                                         
|                              | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                         
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                                         
|                              | ITEM 1. Legal Proceedings                                                                     |                                                                                                                         
|                              | ITEM 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                         
|SIGNATURES                    |                                                                                               | 48                                                                                                                      

2

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Item 1. Financial Statements

CHIRON CORPORATION        CONDENSED CONSOLIDATED BALANCE SHEETS        (Unaudited)        (In thousands, except share data)

|                                                                |                                                                                                       | March 31,
2001                                             |           | December 31,
2000 |          
|--------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | --------- | ----------------- | ---------
|ASSETS                                                          |                                                                                                      
|Current assets:                                                 |                                                                                                       |                                                            |           |                   |          
|                                                                | Cash and cash equivalents                                                                             |                                                            | $         | 218,306           |          
|                                                                | Short-term investments in marketable debt securities                                                  |                                                            |           | 436,854           |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Total cash and short-term investments                      |           |                   | 655,160  
|                                                                | Accounts receivable, net                                                                              |                                                            |           | 202,182           |          
|                                                                | Current portion of notes receivable                                                                   |                                                            |           | 5,631             |          
|                                                                | Inventories                                                                                           |                                                            |           | 118,014           |          
|                                                                | Current net deferred income tax asset                                                                 |                                                            |           | 41,245            |          
|                                                                | Derivative financial instruments                                                                      |                                                            |           | 18,413            |          
|                                                                | Other current assets                                                                                  |                                                            |           | 27,783            |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Total current assets                                       |           |                   | 1,068,428
|Noncurrent investments in marketable debt securities            |                                                                                                       |                                                            | 213,925   |                   |          
|Property, plant, equipment and leasehold improvements, at cost: |                                                                                                       |                                                            |           |                   |          
|                                                                | Land and buildings                                                                                    |                                                            |           | 138,169           |          
|                                                                | Laboratory, production and office equipment                                                           |                                                            |           | 339,253           |          
|                                                                | Leasehold improvements                                                                                |                                                            |           | 84,890            |          
|                                                                | Construction-in-progress                                                                              |                                                            |           | 28,737            |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       |                                                            |           | 591,049           |          
|                                                                | Less accumulated depreciation and amortization                                                        |                                                            |           | (286,240          | )        
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Property, plant, equipment and leasehold improvements, net |           |                   | 304,809  
|Purchased technologies, net                                     |                                                                                                       |                                                            | 297,109   |                   |          
|Goodwill, net                                                   |                                                                                                       |                                                            | 204,394   |                   |          
|Other intangible assets, net                                    |                                                                                                       |                                                            | 186,864   |                   |          
|Investments in equity securities and affiliated companies       |                                                                                                       |                                                            | 122,860   |                   |          
|Noncurrent notes receivable                                     |                                                                                                       |                                                            | 13,247    |                   |          
|Other noncurrent assets                                         |                                                                                                       |                                                            | 15,938    |                   |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | $                                                          | 2,427,574 |                   | $        
|                                                                |                                                                                                       |                                                            |           |                   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                            |                                                                                                      
|Current liabilities:                                            |                                                                                                       |                                                            |           |                   |          
|                                                                | Accounts payable                                                                                      |                                                            | $         | 45,209            |          
|                                                                | Accrued compensation and related expenses                                                             |                                                            |           | 39,096            |          
|                                                                | Short-term borrowings                                                                                 |                                                            |           | 1,397             |          
|                                                                | Current portion of long-term debt                                                                     |                                                            |           | 636               |          
|                                                                | Current portion of unearned revenue                                                                   |                                                            |           | 46,267            |          
|                                                                | Taxes payable                                                                                         |                                                            |           | 114,856           |          
|                                                                | Derivative financial instruments                                                                      |                                                            |           | 1,994             |          
|                                                                | Other current liabilities                                                                             |                                                            |           | 137,315           |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Total current liabilities                                  |           |                   | 386,770  
|Long-term debt                                                  |                                                                                                       |                                                            | 2,760     |                   |          
|Noncurrent net deferred income tax liability                    |                                                                                                       |                                                            | 70,862    |                   |          
|Noncurrent unearned revenue                                     |                                                                                                       |                                                            | 40,291    |                   |          
|Other noncurrent liabilities                                    |                                                                                                       |                                                            | 40,220    |                   |          
|Minority interest                                               |                                                                                                       |                                                            | 3,249     |                   |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Total liabilities                                          |           |                   | 544,152  
|                                                                |                                                                                                       |                                                            |           |                   |          
|Commitments and contingencies (Note 9)                          |                                                                                                       |                                                            |           |                   |          
|Put options                                                     |                                                                                                       |                                                            | 22,477    |                   |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|Stockholders' equity:                                           |                                                                                                       |                                                            |           |                   |          
|                                                                | Common stock                                                                                          |                                                            |           | 1,917             |          
|                                                                | Additional paid-in capital                                                                            |                                                            |           | 2,404,456         |          
|                                                                | Deferred stock compensation                                                                           |                                                            |           | (21,072           | )        
|                                                                | Accumulated deficit                                                                                   |                                                            |           | (409,987          | )        
|                                                                | Accumulated other comprehensive income (loss)                                                         |                                                            |           | (23,279           | )        
|                                                                | Treasury stock, at cost (2,063,000 shares at March 31, 2001and 2,183,000 shares at December 31, 2000) |                                                            |           | (91,090           | )        
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Total stockholders' equity                                 |           |                   | 1,860,945
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | $                                                          | 2,427,574 |                   | $        
|                                                                |                                                                                                       |                                                            |           |                   |          

The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.

3

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CHIRON CORPORATION        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (Unaudited)        (In thousands, except per share data)

|                                                      |                                                            | Three Months Ended
March 31, |       
|----------------------------------------------------- | ---------------------------------------------------------- | ---------------------------- | ------
|
|Revenues:                                             |                                                            |                              |       
|                                                      | Product sales, net                                         |                              | $     
|                                                      | Equity in earnings of unconsolidated joint businesses      |                              |       
|                                                      | Collaborative agreement revenues                           |                              |       
|                                                      | Royalty and license fee revenues                           |                              |       
|                                                      | Other revenues                                             |                              |       
|                                                      |                                                            |                              |       
|                                                      |                                                            | Total revenues               |       
|                                                      |                                                            |                              |       
|Operating expenses:                                   |                                                            |                              |       
|                                                      | Cost of sales                                              |                              |       
|                                                      | Research and development                                   |                              |       
|                                                      | Selling, general and administrative                        |                              |       
|                                                      | Amortization expense                                       |                              |       
|                                                      | Restructuring and reorganization charge reversals (Note 5) |                              |       
|                                                      | Other operating expenses                                   |                              |       
|                                                      |                                                            |                              |       
|                                                      |                                                            | Total operating expenses     |       
|                                                      |                                                            |                              |       
|Income from operations                                |                                                            |                              | 47,396
|Gain (loss) on sale of assets                         |                                                            |                              | 2,426 
|Interest expense                                      |                                                            |                              | (398  
|Other income, net                                     |                                                            |                              | 18,056
|Minority interest                                     |                                                            |                              | (219  
|                                                      |                                                            |                              |       
|Income from continuing operations before income taxes |                                                            |                              | 67,261
|Provision for income taxes                            |                                                            |                              | 22,518
|                                                      |                                                            |                              |       
|Income from continuing operations                     |                                                            |                              | 44,743
|Gain on disposal of discontinued operations (Note 3)  |                                                            |                              |      
|                                                      |                                                            |                              |       
|Net income                                            |                                                            | $                            | 44,743
|                                                      |                                                            |                              |       
|Basic earnings per share (Note 2):                    |                                                            |                              |       
|                                                      | Income from continuing operations                          |                              | $     
|                                                      |                                                            |                              |       
|                                                      | Net income                                                 |                              | $     
|                                                      |                                                            |                              |       
|Diluted earnings per share (Note 2):                  |                                                            |                              |       
|                                                      | Income from continuing operations                          |                              | $     
|                                                      |                                                            |                              |       
|                                                      | Net income                                                 |                              | $     
|                                                      |                                                            |                              |       

The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.

4

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CHIRON CORPORATION        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        (Unaudited)        (In thousands)

|                                   |                                                                                                                                                                           | Three Months Ended
March 31,                                                                                                                                                          |       
|---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------
|
|Net income                         |                                                                                                                                                                           | $                                                                                                                                                                                     | 44,743
|                                   |                                                                                                                                                                           |                                                                                                                                                                                       |       
|Other comprehensive income (loss): |                                                                                                                                                                           |                                                                                                                                                                                       |       
|                                   | Change in foreign currency translation adjustment during the period, net of tax benefit of $252 and $100 for the three months ended March 31, 2001 and 2000, respectively |                                                                                                                                                                                       |       
|                                   | Net unrealized derivative gains from cash flow hedges arising during the period, net of tax provision of $177 for the three months ended March 31, 2001                   |                                                                                                                                                                                       |       
|                                   | Unrealized gains (losses) from investments:                                                                                                                               |                                                                                                                                                                                       |       
|                                   |                                                                                                                                                                           | Unrealized holding gains (losses) arising during the period, net of tax (provision) benefit of $11,992 and $(13,605) for the three months ended March 31, 2001 and 2000, respectively |       
|                                   |                                                                                                                                                                           | Reclassification adjustment for net gains included in net income, net of tax provision of $257 for the three months ended March 31, 2001                                              |       
|                                   |                                                                                                                                                                           |                                                                                                                                                                                       |       
|                                   |                                                                                                                                                                           | Net unrealized gains (losses) from investments                                                                                                                                        |       
|                                   |                                                                                                                                                                           |                                                                                                                                                                                       |       
|                                   | Other comprehensive income (loss)                                                                                                                                         |                                                                                                                                                                                       |       
|                                   |                                                                                                                                                                           |                                                                                                                                                                                       |       
|Comprehensive income               |                                                                                                                                                                           | $                                                                                                                                                                                     | 3,967 
|                                   |                                                                                                                                                                           |                                                                                                                                                                                       |       

The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.

5

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CHIRON CORPORATION        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (Unaudited)        (In thousands)

|                                                     |                                                                               | Three Months Ended
March 31,              |        
|---------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------------------------- | -------
|
|Net cash provided by operating activities            |                                                                               | $                                         | 48,758 
|                                                     |                                                                               |                                           |        
|Cash flows from investing activities:                |                                                                               |                                           |        
|                                                     | Purchases of investments in marketable debt securities                        |                                           |        
|                                                     | Proceeds from sale and maturity of investments in marketable debt securities  |                                           |        
|                                                     | Capital expenditures                                                          |                                           |        
|                                                     | Proceeds from sale of assets                                                  |                                           |        
|                                                     | Purchases of equity securities and interests in affiliated companies          |                                           |        
|                                                     | Proceeds from sale of equity securities and interests in affiliated companies |                                           |        
|                                                     | Cash paid to purchase PathoGenesis Corporation                                |                                           |        
|                                                     | Other, net                                                                    |                                           |        
|                                                     |                                                                               |                                           |        
|                                                     |                                                                               | Net cash provided by investing activities |        
|                                                     |                                                                               |                                           |        
|Cash flows from financing activities:                |                                                                               |                                           |        
|                                                     | Net proceeds from (repayment of) short-term borrowings                        |                                           |        
|                                                     | Repayment of debt and capital leases                                          |                                           |        
|                                                     | Payments to acquire treasury stock                                            |                                           |        
|                                                     | Proceeds from reissuance of treasury stock                                    |                                           |        
|                                                     | Proceeds from put options                                                     |                                           |        
|                                                     |                                                                               |                                           |        
|                                                     |                                                                               | Net cash used in financing activities     |        
|                                                     |                                                                               |                                           |        
|                                                     |                                                                               | Net increase in cash and cash equivalents |        
|Cash and cash equivalents at beginning of the period |                                                                               |                                           | 166,990
|                                                     |                                                                               |                                           |        
|Cash and cash equivalents at end of the period       |                                                                               | $                                         | 218,306
|                                                     |                                                                               |                                           |        

The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.

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CHIRON CORPORATION        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        March 31, 2001        (Unaudited)

Note 1The Company and Summary of Significant Accounting Policies

Basis of Presentation

The information presented in the Condensed Consolidated Financial Statements at March 31, 2001, and for the three months ended March 31, 2001 and
2000, is unaudited but includes all normal recurring adjustments, which the management of Chiron Corporation ("Chiron" or the "Company") believes to be necessary for fair presentation of the periods
presented.

The
Condensed Consolidated Balance Sheet amounts at December 31, 2000 have been derived from audited financial statements. Interim results are not necessarily indicative of
results for a full year. This information should be read in conjunction with Chiron's audited Consolidated Financial Statements for the year ended December 31, 2000, which are included in the
Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. For consolidated majority-owned
subsidiaries in which the Company owns less than 100%, the Company records "Minority interest" in the Condensed Consolidated Financial Statements to account for the ownership interest of the minority
owner. Investments in joint ventures, partnerships and interests in which the Company has an equity interest of 50% or less are accounted for using either the equity or cost method. All significant
intercompany accounts and transactions have been eliminated in consolidation.

On
September 21, 2000, Chiron acquired PathoGenesis Corporation ("PathoGenesis"). The Company included PathoGenesis' operating results, including the seven business days from
September 21 to 30, 2000, in its consolidated operating results beginning on October 1, 2000. PathoGenesis' operating results
for the seven business days in September 2000 were not significant to the Company's consolidated operating results (see Note 4).

In
2000, the Company became a limited partner of Burrill Biotechnology Capital Fund, L.P. The Company will pay $25.0 million over five years, of which $10.8 million was
paid through March 31, 2001, for an ownership percentage of 23.25%. The Company accounts for the investment under the equity method of accounting pursuant to EITF Topic
No. D-46 "Accounting for Limited Partnership Investments."

Use of Estimates and Reclassifications

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the Company's consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

The
Company, prior to filing its financial statements on Form 10-Q, publicly releases an unaudited condensed balance sheet and statement of operations. Between the
date of the Company's earnings release and the filing of its Form 10-Q, reclassifications may be required. These reclassifications, when made, have no effect on income from
continuing operations, net income or earnings per share.

7

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Certain previously reported amounts have been reclassified to conform with the current period presentation.

Related
to the acquisition of PathoGenesis on September 21, 2000, the Company allocated the purchase price based on the estimated fair values of the assets acquired and
liabilities assumed. Effective March 31, 2001, the Company recorded a purchase price adjustment resulting from (i) a final reconciliation of PathoGenesis registered shares of common
stock, (ii) the true-up of severance and legal costs to amounts actually paid and (iii) the related deferred tax effects, the total of which resulted in a $1.7 million
increase to the purchase price and a $0.7 million increase to goodwill. For the three months ended March 31, 2001, amortization expense increased by $0.01 million as a result of
this adjustment but had no material impact on earnings per share.

In
the third quarter of 2000, the Company reclassified $32.7 million from "Accumulated other comprehensive income (loss)," of which $34.9 million was reclassified to the
"Noncurrent net deferred income tax liability" with an offsetting entry of $2.2 million to "Taxes payable." These reclassifications represented the cumulative tax effect on the Company's net
unrealized gains from investments and the Company's foreign currency translation adjustments, respectively, as the Company had not previously recorded these amounts net of deferred taxes and taxes
payable. The adjustment had no effect on income from continuing operations, net income or earnings per share. Certain previously reported amounts in the Condensed Consolidated Balance Sheets and the
Condensed Consolidated Statements of Comprehensive Income have been reclassified to conform with the current period presentation.

Inventories

Inventories are stated at the lower of cost or market using the moving weighted-average cost method. Inventories consisted of the following (in thousands):

March 31,
2001

December 31,
2000Finished goods

$
23,030

$
25,590Work-in-process


66,222


57,754Raw materials


28,762


25,369$
118,014

$
108,713


Derivative Financial Instruments

Effective January 1, 2001, the Company implemented SFAS 133, which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on
the balance sheet at fair value. If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in "Other comprehensive
income" and are recognized in earnings when the underlying exposure affects earnings. Ineffective portions of the changes in the fair value of cash flow hedges are recognized in earnings. If the
derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the

8

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underlying exposure are recognized in earnings. Prior to placement of the fair value hedge, changes in the fair value of the underlying exposure are recognized in "Other comprehensive income." For
derivative instruments not designated as hedges under SFAS 133, changes in their fair values are recognized currently in earnings.

On
January 1, 2001, the Company had several equity forward sales contracts, which were classified as fair value hedges under SFAS 133. Under SFAS 133, the change
in the difference between the spot price and the forward price is excluded from the assessment of hedge effectiveness and, accordingly, recognized in earnings along with any hedge ineffectiveness.
Prior to the implementation of SFAS 133, the Company had been recognizing in earnings the interest stream on the contracts pursuant to Statement of Financial Accounting Standards No. 80,
"Accounting for Futures Contracts" ("SFAS 80"). The Company determined that the difference between the change in the fair value of the contracts (SFAS 133) and the interest stream (SFAS
80) was not material and, therefore, did not record a cumulative adjustment related to the implementation of SFAS 133.

The
Company may utilize derivative financial instruments, such as foreign currency option contracts ("currency options"), forward foreign currency contracts ("currency forwards") and
cross currency interest rate swaps ("currency swaps"), to reduce foreign exchange and interest rate risks. The currency swaps, which would be designated as cash flow hedges, modify or fix the interest
and/or currency characteristics of certain assets and liabilities. The Company may use forward sales contracts ("equity forwards") to reduce equity securities risk. Derivative financial instruments
are not used for trading or speculative purposes. The Company's control environment includes policies and procedures for risk assessment and the approval, reporting and monitoring of foreign currency
hedging activities. Counterparties to the Company's hedging agreements are major financial institutions. These hedging agreements are generally not collateralized. The Company manages the risk of
counterparty default on its derivative financial instruments through the use of credit standards, counterparty diversification and monitoring of counterparty financial conditions. For those instances
in which the Company utilizes currency swaps, the Company also has master netting arrangements that may reduce the maximum amount of loss due to credit risk. Chiron has not experienced any losses due
to counterparty default.

For
currency options and equity forwards, the Company assumes no ineffectiveness because the critical terms of the derivative instrument and of the underlying exposure are the same.
The Company expects that changes in the fair value of the underlying exposure will be offset completely by changes in the fair value of the derivative instrument, both at inception and on an ongoing
basis. The critical terms are reviewed quarterly. All time value changes are deemed ineffective and are recognized immediately in earnings.

When
currency options expire, amounts recorded in "Other comprehensive income" for cash flow hedges are reclassified to earnings. When equity forwards mature, any amounts recorded in
"Other comprehensive income" related to the underlying exposure are reclassified to earnings.



Chiron may selectively hedge anticipated currency exposures by purchasing currency options, which are designated as cash flow hedges and typically expire
within twelve months. The Company's primary

9

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anticipated exposures are related to foreign revenues recognized from selling products in major European countries.

A
significant portion of the Company's operations consists of manufacturing and sales activities in western European countries. As a result, the Company's financial results may be
affected by changes in the foreign currency exchange rates of those related countries. The Company uses currency forwards to
hedge the gains and losses generated by the remeasurement of certain receivables and payables denominated in nonfunctional currencies. Typically, these contracts have maturities of three months or
less. These derivatives are not designated as hedges under SFAS 133.



The Company has exposure to changes in interest rates in both its investment portfolio and certain floating rate obligations with interest rates tied to LIBOR.
The Company maintains a diversified portfolio of investment holdings issued by financial institutions of high credit standing. By policy, the amount of credit exposure to any one institution is
limited. These investments are generally not collateralized and primarily mature within three years. The Company has a natural hedge against the floating rate obligations exposure as a result of its
investment holdings in floating rate fixed income securities tied to LIBOR.



The Company has exposure to equity price risk because of its investments in equity securities. Typically, the Company obtains these securities through its
collaboration agreements with other pharmaceutical and biotechnology partners. Changes in share prices or in the volatility of share prices affect the value of Chiron's equity portfolio. To reduce
this risk, the Company selectively enters into equity forwards, which are designated as fair value hedges and typically expire within two to four years.

Income Taxes

The effective tax rate for 2001 is estimated to be approximately 33.5% of pretax income from continuing operations, which reflects the amortization of goodwill
and acquired identifiable intangible assets related to the PathoGenesis acquisition. The effective tax rate may be affected in future periods by changes in management's estimates with respect to the
Company's deferred tax assets and other items affecting the overall tax rate. Income tax expense for the three months ended March 31, 2000 was based on an estimated annual effective tax rate on
pretax income from continuing operations of approximately 31.0%.

The
annual reported effective tax rate for 2000 was 84.4% of pretax income from continuing operations and reflected the write-off of purchased in-process
technologies and amortization expense on goodwill and acquired identifiable intangible assets related to the PathoGenesis acquisition.

Put Options

Proceeds from sales of put options, which allow for net-cash, net-share or physical settlement, are recorded in stockholders' equity
and an amount equal to the redemption price of the common stock is

10

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reclassified from permanent equity to temporary equity. Subsequent changes in the market value of the put options are not recorded as long as the put options are classified as equity. If a put option
is reclassified from permanent or temporary equity to an asset or a liability, the change in fair value of the put option during the period it was classified as equity is recorded in stockholders'
equity. The Company reassesses the classification of its put options on a quarterly basis. When a put option is
settled in net cash or net shares, the amount reported in temporary equity is transferred and reported as an addition to permanent equity.

In
January 2001, the Company initiated a put option program. Under this program, the Company entered into a contract with a third party to sell put options on Chiron stock,
entitling the holder to sell to the Company 0.5 million shares at $44.95 per share on April 19, 2001. In connection with the sale, the Company collected a $2.6 million premium,
which was recorded in "Additional paid-in capital" in the Condensed Consolidated Balance Sheets. The amount of the Company's obligation to repurchase such shares upon exercise of the
outstanding put options, totaling $22.5 million, was reclassified from "Additional paid-in capital" to "Put options" in temporary equity in the Company's Condensed Consolidated
Balance Sheets at March 31, 2001.

On
April 19, 2001, Chiron's closing stock price was $47.02. Since the closing stock price was above the stipulated $44.95, the third party elected not to exercise the options.
As a result, the temporary equity of $22.5 million was reclassified to permanent equity in the second quarter of 2001.

Treasury Stock

Treasury stock is stated at cost. Gains on reissuance of treasury stock are credited to "Additional paid-in capital." Losses on reissuance of
treasury stock are charged to "Additional paid-in capital" to the extent of available net gains on reissuance of treasury stock. Otherwise, losses are charged to "Accumulated deficit." For
the three months ended March 31, 2001 and 2000, the Company charged losses of $15.8 million and $49.0 million, respectively, to "Accumulated deficit" in the Condensed Consolidated
Balance Sheets.

Note 2Earnings Per Share

Basic earnings per share is based upon the weighted-average number of common shares outstanding. Diluted earnings per share is based upon the weighted-average
number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares could result from (i) the assumed exercise of outstanding stock options, warrants and
equivalents, which are included under the treasury-stock method; (ii) performance units to the extent that dilutive shares are assumed issuable; (iii) the assumed exercise of outstanding
put options, which are included under the reverse treasury-stock method; and (iv) convertible debentures, which are included under the if-converted method.

11

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The following table sets forth the computations for basic and diluted earnings per share on income from continuing operations (in thousands, except per share data):

|                           |                                                                                              | Three Months Ended
March 31,
|-------------------------- | -------------------------------------------------------------------------------------------- | ----------------------------
|
|Income (Numerator):        |                                                                                              |                             
|                           | Income from continuing operations available to common stockholders                           |                             
|                           | Plus: Interest on 1.90% convertible debentures, net of taxes                                 |                             
|                           |                                                                                              |                             
|                           | Income from continuing operations available to common stockholders, plus assumed conversions |                             
|                           |                                                                                              |                             
|Shares (Denominator):      |                                                                                              |                             
|                           | Weighted-average common shares outstanding                                                   |                             
|                           | Effect of dilutive securities:                                                               |                             
|                           |                                                                                              | Options and equivalents     
|                           |                                                                                              | Warrants                    
|                           |                                                                                              | Put options                 
|                           |                                                                                              | 1.90% convertible debentures
|                           |                                                                                              |                             
|                           | Weighted-average common shares outstanding, plus assumed conversions                         |                             
|                           |                                                                                              |                             
|Basic earnings per share   |                                                                                              | $                           
|                           |                                                                                              |                             
|Diluted earnings per share |                                                                                              | $                           
|                           |                                                                                              |                             

The
following table sets forth the computations for basic and diluted earnings per share on net income (in thousands, except per share data):

|                           |                                                                       | Three Months Ended
March 31,
|-------------------------- | --------------------------------------------------------------------- | ----------------------------
|
|Income (Numerator):        |                                                                       |                             
|                           | Net income available to common stockholders                           |                             
|                           | Plus: Interest on 1.90% convertible debentures, net of taxes          |                             
|                           |                                                                       |                             
|                           | Net income available to common stockholders, plus assumed conversions |                             
|                           |                                                                       |                             
|Shares (Denominator):      |                                                                       |                             
|                           | Weighted-average common shares outstanding                            |                             
|                           | Effect of dilutive securities:                                        |                             
|                           |                                                                       | Options and equivalents     
|                           |                                                                       | Warrants                    
|                           |                                                                       | Put options                 
|                           |                                                                       | 1.90% convertible debentures
|                           |                                                                       |                             
|                           | Weighted-average common shares outstanding, plus assumed conversions  |                             
|                           |                                                                       |                             
|Basic earnings per share   |                                                                       | $                           
|                           |                                                                       |                             
|Diluted earnings per share |                                                                       | $                           
|                           |                                                                       |                             

12

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For
the three months ended March 31, 2001 and 2000, options to purchase 7.2 million and 0.6 million shares, respectively, with exercise prices
greater than the average market prices of common stock, were excluded from the respective computations of diluted earnings per share as their inclusion would be antidilutive.

Also
excluded from the computation of diluted earnings per share for the three months ended March 31, 2000 were 3.2 million shares of common stock which were issuable
upon conversion of the Company's convertible subordinated debentures. These shares were excluded as the interest, net of tax, per common share obtainable on conversion exceeded basic earnings per
share. As of December 31, 2000, substantially all of the convertible subordinated debentures were converted into 12.0 million shares of common stock.

Note 3Discontinued Operations

In a strategic effort to focus on its core businesses of Biopharmaceuticals, Vaccines and Blood Testing, the Company completed the sale of Chiron Diagnostics
and Chiron Vision in 1998 and 1997, respectively. Discontinued operations had no impact on basic or diluted earnings per share for the three months ended March 31, 2001. Discontinued operations
had no material impact on basic or diluted earnings per share for the three months ended March 31, 2000.

The
"Gain on disposal of discontinued operations" consisted of the following (in thousands):

Three Months Ended
March 31, 2000Other

$
245Income tax provision


(93
)$
152


Chiron Diagnostics

On November 30, 1998, Chiron completed the sale of itsin vitrodiagnostics business to Bayer
Corporation ("Bayer") for $1,013.8 million in cash, subject to certain post-closing adjustments. The sale was completed under the terms of a Stock Purchase Agreement (the "Bayer
Agreement"), dated as of September 17, 1998, between Chiron and Bayer. The results of operations for Chiron Diagnostics are reported as a discontinued operation for all periods presented in the
Condensed Consolidated Statements of Operations. Chiron has provided customary indemnities under the terms of the Bayer Agreement.

In
connection with the sale of Chiron Diagnostics, Chiron granted to Chiron Diagnostics rights under certain Chiron patents, including non-exclusive rights to patents
relating to human immunodeficiency virus
("HIV") and hepatitis C virus ("HCV"). In exchange for these rights, Chiron Diagnostics paid to Chiron $100.0 million, which is refundable in decreasing amounts through 2001. For the three
months ended March 31, 2001 and 2000, Chiron recognized revenues of $5.0 million and $7.5 million, respectively, which represented the portions of the $100.0 million
payment that became nonrefundable during those periods. The revenues were recorded as a component of "Royalty and license fee revenues" in the Condensed

13

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Consolidated Statements of Operations. The Company anticipates recognizing the remaining revenue of $13.3 million through the fourth quarter 2001.

Chiron Vision

On December 29, 1997, Chiron completed the sale of all of the outstanding capital stock of Chiron Vision to Bausch & Lomb ("B&L")
for approximately $300.0 million in cash, subject to certain post-closing adjustments. The sale was completed under the terms of a Stock Purchase Agreement (the "B&L Agreement"),
dated as of October 21, 1997, between Chiron and B&L. The Company retained Chiron Vision's cash and cash equivalents totaling $2.7 million, certain Chiron Vision real estate assets (the
"real estate assets") with a carrying value of $25.1 million and Chiron Vision's future noncancelable operating lease costs totaling $1.1 million upon the completion of the sale. Under
the terms of the B&L Agreement, the Company has provided customary indemnities and, accordingly, reserved for such contractual obligations to indemnify B&L against certain potential claims. For both
the three months ended March 31, 2001 and 2000, none of these contractual obligations expired unused.

For
a period of three years following the completion of the sale, Chiron Vision has the right to use a portion of the real estate assets, which were occupied at closing, on a
rent-free basis. As of both March 31, 2001 and December 31, 2000, the real estate assets of $1.9 million, which represented all of the remaining net assets of Chiron's
discontinued operations, were recorded as "Other current assets" in the Condensed Consolidated Balance Sheets. In April 2001, the Company sold these real estate assets
and anticipates that it will recognize a net gain on the sale of these assets in the second quarter of 2001.

Income Taxes

In connection with the sale of Chiron Diagnostics and Chiron Vision, the Company recorded cumulative net deferred tax assets of $26.5 million as of both
March 31, 2001 and December 31, 2000, principally attributable to the timing of the deduction of certain expenses associated with these sales. The Company also recorded corresponding
valuation allowances of $26.5 million as of both March 31, 2001 and December 31, 2000 to offset these deferred tax assets, as management does not believe that it is more likely
than not that the deferred tax assets to which the valuation allowance relates will be realized. The future recognition of these deferred tax assets will be reported as a component of "Gain on
disposal of discontinued operations" in the Condensed Consolidated Statements of Operations.

Note 4Acquisition of PathoGenesis Corporation

On September 21, 2000, Chiron acquired PathoGenesis, a company that develops and markets drugs to treat infectious diseases, particularly serious lung
infections. The acquisition was accounted for under the purchase method of accounting and included the purchase of all of the outstanding shares of common stock of PathoGenesis at $38.50 per share. As
discussed in Note 1, effective March 31, 2001, the Company recorded a purchase price adjustment resulting from (i) a final reconciliation of PathoGenesis registered shares of
common stock, (ii) the true-up of severance and legal costs to amounts actually paid and (iii) the related deferred tax effects, which resulted in a $1.7 million
increase to the purchase price and a

14

---

$0.7 million increase to goodwill. The revised components and allocation of the purchase price consisted of the following (in thousands):

Consideration and acquisition costs:Cash paid for common stock

$
643,026Cash paid for options on common stock


66,216Acquisition costs paid as of March 31, 2001


18,074Acquisition costs not yet paid as of March 31, 2001


4,954Fair value, less intrinsic value for unvested portion, of options exchanged


3,371Total purchase price

$
735,641Allocation of purchase price:Assets acquired

$
94,784Write-off of purchased in-process technologies


171,600Purchased technologies


300,600Acquired intangible assets


53,900Goodwill


212,729Liabilities assumed


(23,609
)Taxes payable


(2,800
)Net deferred tax liability


(71,563
)Total purchase price

$
735,641


Outstanding
options on PathoGenesis' stock were either redeemed in cash or converted into options on Chiron's stock. The difference between the fair value of all options and the
intrinsic value associated with the unvested portion of those options was included as part of the purchase price.

Acquisition
costs included contractual severance and involuntary termination costs, as well as other direct acquisition costs. Approximately $14.8 million represented severance
payments, assumed by the Company, to executives as dictated by their employment agreements.

The
Company allocated the purchase price based on the fair value of the assets acquired and liabilities assumed. A portion of the purchase price was allocated to purchased
in-process technologies and was written off entirely in the fourth quarter of 2000. The write-off of purchased in-process technologies represented the fair value at
the acquisition date, calculated utilizing the income approach, of the portion of certain in-process research and development projects that were not reliant upon core technology. Core
technology represents technology that has been utilized in approved or commercialized products. Certain research and development projects deemed too early in terms of completion metrics and any future
yet-to-be-defined technologies were not included in the calculation of in-process technologies. The Company does not anticipate that there will be any
alternative future use for the in-process technologies that were written off. In valuing the purchased in-process technologies, the Company used
probability-of-success-adjusted cash flows and a 15% discount rate. Cash inflows from any one in-process

15

---

product were assumed to commence between 2002 and 2008. As with all biotechnology products, the probability of commercial success for any one research and development project is highly uncertain.

Purchased
technologies represented the fair value of research and development projects, which will be developed further and supported after the acquisition date, and are being
amortized on a straight-line basis over 15 years. Acquired intangible assets included the fair value of trademarks and trade names, patents, databases and the work force, which are
being amortized on a straight-line basis over 5 to 16 years. Goodwill resulting from the PathoGenesis acquisition is being amortized on a straight-line basis over
15 years. Since the Company elected to treat the acquisition as taxable in California, the Company recorded current taxes payable of $2.8 million. The net deferred tax liability
primarily related to the difference between the carrying amounts and tax bases of the purchased technology and acquired intangible assets, offset by future utilization of net operating loss and tax
credit carryforwards. Upon acquisition, the Company acquired federal net operating loss carryforwards and federal business credits of approximately $116.6 million and $6.5 million,
respectively, attributed to PathoGenesis.

The
following unaudited pro forma information presents the results of continuing operations of Chiron and PathoGenesis for the three months ended March 31, 2000 as if Chiron's
acquisition of PathoGenesis had been consummated as of January 1, 2000. The pro forma information does not purport to be indicative of what would have occurred had the acquisition been made as
of this date or of results that may occur in the future. The pro forma results exclude nonrecurring charges, such as the write-off of purchased in-process technologies, which
resulted directly from the transaction. The unaudited pro forma information is as follows (in thousands, except per share data):

Three Months Ended
March 31, 2000Total revenues

$
236,293Income from continuing operations

$
30,111Pro forma earnings per share from continuing operations:Basic

$
0.17Diluted

$
0.16


Note 5Restructuring and Reorganization

The Company recorded restructuring and reorganization charges related to (i) the integration of its worldwide vaccines operations, (ii) the
closure of its Puerto Rico and St. Louis, Missouri facilities and (iii) the ongoing restructuring of its business operations. The integration of its worldwide vaccines operations consisted of
termination and other employee-related costs recognized in connection with the elimination of 28 positions, all of which had terminated as of December 31, 2000, in the Company's Italian
manufacturing facility and facility-related costs. The closure of its Puerto Rico and St. Louis facilities and the ongoing restructuring of its business operations consisted of termination and other
employee-related costs recognized in connection with the elimination of 400 positions in manufacturing, research, development, sales, marketing and other administrative functions, and facility-related
costs. Employee termination costs included wage continuation, advance notice pay and medical and other benefits. Facility-

16

---

related costs included losses on disposal of property, plant and equipment, lease payments and other related costs.

During
1999, the Company decided to retain 18 of those 400 positions to support future contract manufacturing activities and, therefore, adjusted the number of positions for
elimination to 382. Again during 2000, the Company decided to retain 11 of those 382 positions to support future contract manufacturing activities and, therefore, adjusted the number of positions for
elimination to 371. Included in the 371 positions were 36 positions at the Company's Amsterdam facility. These positions were transferred to the buyer in January 2000 in connection with the
December 1999 sale of the Amsterdam facility.

For
the three months ended March 31, 2001, the net restructuring and reorganization activity included a charge of $0.2 million and a charge reversal of
$0.2 million. The charge of $0.2 million primarily related to revised estimates of termination and other employee-related costs recorded in connection with the elimination of the 371
positions, of which 359 had terminated as of March 31, 2001. The charge reversal of $0.2 million primarily related to revised estimates of facility-related costs.

For
the three months ended March 31, 2000, the Company recorded net restructuring and reorganization charge reversals of $0.4 million primarily related to revised
estimates of termination and other employee-related costs recorded in connection with the retention of 11 of the 382 positions. As described above, the Company adjusted the number of positions for
elimination to 371, of which 356 had terminated as of March 31, 2000.

Included
in "Gain on disposal of discontinued operations" in the Condensed Consolidated Statements of Operations were net restructuring and reorganization charge reversals of
$0.1 million for the three months ended March 31, 2000. This amount related to the restructuring of the Company'sin vitrodiagnostics
business operations and primarily consisted of employee termination costs related to the
termination of 331 employees, all of which were terminated as of December 31, 1998. The Company retained responsibility for $4.5 million of restructuring accruals upon the completion of
the sale of Chiron Diagnostics to Bayer. The restructuring accruals were fully utilized as of December 31, 2000.

The
Company's restructuring and reorganization accruals are expected to be substantially settled within one to six years of accruing the related charges. As of March 31, 2001,
$1.3 million and $0.9 million were included in "Other current liabilities" and "Other noncurrent liabilities," respectively, in the Condensed Consolidated Balance Sheets. As of
December 31, 2000, $1.7 million and $1.0 million were included in "Other current liabilities" and "Other noncurrent liabilities," respectively, in the Condensed Consolidated
Balance Sheets.

17

---

The activity in accrued restructuring and reorganization for the three months ended March 31, 2001 and 2000 is summarized as follows (in thousands):

|                             |  | Accrual at
December 31,
2000 |       | Amount of
Total
Restructuring
Charge |   | Amount of
Total
Restructuring
Charge Reversal |  | Amount
Utilized
Through
March 31, 2001 |      | Amount to
Be Utilized
In Future
Periods
|---------------------------- |  | ---------------------------- | ----- | ------------------------------------ | - | --------------------------------------------- |  | -------------------------------------- | ---- | ---------------------------------------
|Employee-related costs       |  | $                            | 1,816 |                                      | $ | 190                                           |  | $                                      |     |                                        
|Other facility-related costs |  |                              | 839   |                                      |   |                                              |  |                                        | (190 | )                                      
|                             |  |                              |       |                                      |   |                                               |  |                                        |      |                                        
|                             |  | $                            | 2,655 |                                      | $ | 190                                           |  | $                                      | (190 | )                                      
|                             |  |                              |       |                                      |   |                                               |  |                                        |      |                                        
|                             |  |                              |       |                                      |   |                                               |  |                                        |      |                                        

|                             |  | Accrual at
December 31,
1999 |       | Amount of
Total
Restructuring
Charge |   | Amount of
Total
Restructuring
Charge Reversal |  | Amount
Utilized
Through
March 31, 2000 |      | Amount to
Be Utilized
In Future
Periods
|---------------------------- |  | ---------------------------- | ----- | ------------------------------------ | - | --------------------------------------------- |  | -------------------------------------- | ---- | ---------------------------------------
|Employee-related costs       |  | $                            | 3,772 |                                      | $ |                                              |  | $                                      | (531 | )                                      
|Other facility-related costs |  |                              | 1,631 |                                      |   | 160                                           |  |                                        |     |                                        
|                             |  |                              |       |                                      |   |                                               |  |                                        |      |                                        
|                             |  |                              | 5,403 |                                      |   | 160                                           |  |                                        | (531 | )                                      
|Discontinued operations      |  |                              | 285   |                                      |   |                                              |  |                                        | (109 | )                                      
|                             |  |                              |       |                                      |   |                                               |  |                                        |      |                                        
|                             |  | $                            | 5,688 |                                      | $ | 160                                           |  | $                                      | (640 | )                                      
|                             |  |                              |       |                                      |   |                                               |  |                                        |      |                                        

Note 6Sale of San Diego Facility

In January 2001, the Company sold various assets, with a carrying value of approximately $1.8 million, of its San Diego facility for
$4.9 million in cash. The Company incurred transaction costs of approximately $0.7 million. The San Diego facility was part of the Company's biopharmaceuticals segment. The sale of the
assets resulted in a net gain of $2.4 million, which was included in "Gain (loss) on sale of assets" in the Condensed Consolidated Statements of Operations. For the three months ended
March 31, 2000, Chiron recognized operating expenses related to the San Diego facility of $3.4 million.

Note 7Derivative Financial Instruments

"Derivative financial instruments" on the Condensed Consolidated Balance Sheets consisted of the following (in thousands):

March 31,
2001Assets:Forward sales contracts

$
16,882Foreign currency option contracts


1,531$
18,413Liabilities:Forward foreign currency contracts

$
1,994


18

---

Hedge
ineffectiveness, determined in accordance with SFAS 133, had no impact on earnings for the three months ended March 31, 2001. No cash flow or fair value hedges
were derecognized or discontinued for the three months ended March 31, 2001.

For
cash flow hedges, derivative gains and losses included in "Other comprehensive income" are reclassified into earnings at the time the forecasted revenue is recognized. For the
three months ended March 31, 2001, no net derivative gains or losses were reclassified into earnings. Based on currency exchange rates as of March 31, 2001, the Company estimates that
$0.5 million of net derivative gains included in "Other comprehensive income" will be reclassified into earnings within the next twelve months. "Other income, net" in the Condensed Consolidated
Statements of Operations for the three
months ended March 31, 2001 included a net loss of less than $0.1 million for changes in the time value of cash flow hedges.

For
fair value hedges, "Other income, net" in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 included a net gain of
$0.9 million for changes in the time value of fair value hedges.

Related
to the forward foreign currency contracts, foreign currency transaction gains, net of the impact of hedging, were not material for the three months ended March 31,
2001.

Note 8Segment Information

Chiron is organized based on the products and services that it offers. Under this organizational structure, the Company has the following three reportable
segments: (i) biopharmaceuticals, (ii) vaccines and (iii) blood testing. The biopharmaceuticals segment consists of therapeutic products and services, with an emphasis on cancer
and infection, as well as the development and acquisition of technologies related to recombinant proteins, small molecules and genomics. The vaccines segment consists principally of products and
services related to adult and pediatric vaccines sold primarily in Germany, Italy, the United Kingdom and other international markets, as well as the development of novel vaccines and vaccination
technology. The blood testing segment consists of Chiron's one-half interest in the pretax operating earnings of its joint business with Ortho-Clinical Diagnostics, Inc. ("Ortho"),
a Johnson & Johnson ("J&J") company, and an alliance with Gen-Probe Incorporated ("Gen-Probe"). Chiron's joint business with Ortho sells a line of immunodiagnostic tests
to detect hepatitis viruses and retroviruses and provides supplemental tests and microplate-based instrument systems to automate test performance and data collection. Chiron's alliance with
Gen-Probe is focused on developing and selling nucleic acid testing ("NAT") products using transcription-mediated amplification ("TMA") technology to screen transfused blood and plasma
products for viral infection.

The
Company's research and development unit earns revenues and incurs expenses that specifically benefit each of the reportable segments. As a result, such revenues and expenses have
been included in the results of operations of the respective reportable segment.

Certain
other revenues and expenses, particularly Novartis research and development funding, certain royalty revenues and unallocated corporate expenses, are not viewed by management
as belonging to any one reportable segment. As a result, these items have been aggregated into an "Other" segment, as

19

---

permitted by Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131").

The
accounting policies of the Company's reportable segments are the same as those described in Note 1The Company and Summary of Significant Accounting Policies.
Chiron evaluates the performance of its segments based on each segment's income (loss) from continuing operations, excluding certain special items, such as restructuring and reorganization charges,
which are shown as reconciling items in the table below.

The
following segment information excludes all significant intersegment transactions as these transactions are eliminated for management reporting purposes (in thousands):

Three Months Ended
March 31,2001

2000RevenuesBiopharmaceuticals

$
99,759

$
58,091Vaccines


85,682


120,862Blood testing, includes equity in earnings of unconsolidated joint businesses of $15,625 and $15,718 for the three months ended March 31, 2001 and 2000, respectively


34,792


26,396Other


39,358


11,396Total revenues

$
259,591

$
216,745Income from continuing operationsBiopharmaceuticals

$
(5,384
)
$
(18,248
)Vaccines


22,212


52,721Blood testing


14,857


11,518Other


15,711


(7,220
)Segment income from operations


47,396


38,771Operating income reconciling items:Restructuring and reorganization charge reversals





371Income from operations


47,396


39,142Gain (loss) on sale of assets


2,426


(224
)Interest expense


(398
)

(5,026
)Other income, net


18,056


24,470Minority interest


(219
)

(201
)Income from continuing operations before income taxes

$
67,261

$
58,161


20

---

Note 9Commitments and Contingencies

In February 2001, the Company's Board of Directors approved a $235.0 million capital expansion project, which includes the construction of two
buildings and a parking structure in Emeryville, California. The Company currently is negotiating design and construction services and evaluating various financing alternatives for this capital
expansion project.

The
Company is party to various claims, investigations and legal proceedings arising in the ordinary course of business. These claims, investigations and legal proceedings relate to
intellectual property rights, contractual rights and obligations, employment matters, claims of product liability and other issues. While there is no assurance that an adverse determination of any of
such matters could not have a material adverse impact in any future period, management does not believe, based upon information known to it, that the final resolution of any of these matters will have
a material adverse effect upon the Company's consolidated financial position and annual results of operations and cash flows.

The
Company is presently under audit in several domestic and international tax jurisdictions. While there is no assurance that the Company will prevail in all audits in the event the
taxing authorities disagree with the Company's interpretations of the tax law, management does not believe, based upon information known to it, that the final resolution of any of these audits will
have a material adverse effect upon the Company's consolidated financial position and annual results of operations and cash flows.

Note 10Subsequent Events

In April 2001, the Company sold the remaining real estate assets, which were retained upon the completion of the sale of Chiron Vision. The Company
anticipates that it will recognize a net gain upon the sale of these assets in the second quarter of 2001. As of both March 31, 2001 and December 31, 2000, these assets were recorded as
"Other current assets" in the accompanying Condensed Consolidated Balance Sheets.

In
April 2001, Chiron, Rhein Biotech N.V. ("Rhein Biotech") and GreenCross Vaccine Corporation ("GCVC") entered into a collaboration to research and develop certain pediatric
combination vaccine products for sale outside of Europe and North America. Under the collaboration agreement, the Company will share the research and development expenses with Rhein Biotech and GCVC.
The Company began recognizing research and development expenses under the collaboration agreement in the second quarter of 2001. The collaboration agreement also requires capital commitments from
Chiron, Rhein Biotech and GCVC. Chiron's commitment is approximately $22.6 million, primarily for the expansion of its Italian manufacturing facilities, which is scheduled to begin in the
second quarter of 2001 and continue through 2008. In connection with the collaboration agreement, Chiron, Rhein Biotech and GCVC also entered into a supply agreement and a manufacturing agreement,
which will be effective should a vaccine under collaboration be commercialized. Under the supply agreement, Chiron will supply Rhein Biotech and GCVC with vaccine products. Under the manufacturing
agreement, Rhein Biotech and GCVC will perform contract manufacturing services for the Company. The agreements contemplate future negotiation that may result in the extension and expansion of this
relationship.

21

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

This Quarterly Report on Form 10-Q contains forward-looking statements. These include statements concerning plans,
objectives, goals, strategies, future events or performance, and all other statements which are other than statements of historical fact, including, without limitation, statements containing words
such as "believes," "anticipates," "expects," "estimates," "projects," "will," "may," "might," and words of a similar nature. The forward-looking statements contained in this Report reflect
management's current beliefs and expectations on the date of this Report. Actual results, performance or outcomes may differ materially from those expressed in the forward-looking statements. Some of
the important factors which, in the view of Chiron Corporation ("Chiron" or the "Company"), could cause actual results to differ are discussed under the caption "Factors That May Affect Future
Results." The Company undertakes no obligation to publicly announce any revisions to these forward-looking statements to reflect facts or circumstances of which management becomes aware after the date
thereof.

The discussion below should be read in conjunction with Part I, Item 1.,"Financial Statements," of this Quarterly Report on Form 10-Q
and Part II, Items 7., 7A., and 8., "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and
"Financial Statements and Supplementary Data," respectively, of the Company's Annual Report on Form 10-K for the year ended December 31, 2000.

Chiron
is a biotechnology company that participates in three global healthcare markets: biopharmaceuticals, vaccines and blood testing. The biopharmaceuticals segment consists of
therapeutic products and services, with an emphasis on the treatment of cancer and infection, as well as the development and acquisition of technologies related to recombinant proteins, small
molecules and genomics. The biopharmaceuticals segment also includes collaborations with (i) Berlex Laboratories, Inc. ("Berlex") and its parent company, Schering AG of Germany, related
to Betaseron® (interferon beta-1b), (ii) Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil"), a Johnson & Johnson ("J&J") company, related to PDGF
(recombinant human platelet-derived growth factor-rhPDGF-BB) and (iii) SkyePharma, Inc. ("SkyePharma") related to DepoCyt®. The vaccines segment consists
principally of adult and pediatric vaccines for viral infections, including flu, rabies and tick-borne encephalitis, and bacterial infections, including meningococcus C and haemophilius
influenzae type B, sold primarily in Germany, Italy, the United Kingdom and other international markets, as well as the development of novel vaccines and vaccination technology. The blood testing
segment consists of Chiron's one-half interest in the pretax operating earnings of its joint business with Ortho-Clinical Diagnostics, Inc.
("Ortho"), a J&J company, and an alliance with Gen-Probe Incorporated ("Gen-Probe"). Chiron's joint business with Ortho sells a line of immunodiagnostic tests to detect
hepatitis viruses and retroviruses and provides supplemental tests and microplate-based instrument systems to automate test performance and data collection. Chiron's alliance with
Gen-Probe is focused on developing and selling nucleic acid testing ("NAT") products using transcription-mediated amplification ("TMA") technology to screen transfused blood and plasma
products for viral infection. Certain other revenues and expenses are not viewed by management as belonging to any one segment. As a result, these items have been aggregated into an "Other" segment.

On
September 21, 2000, Chiron acquired PathoGenesis Corporation ("PathoGenesis"), a company that develops and markets drugs to treat infectious diseases, particularly serious
lung infections. The Company accounted for the acquisition under the purchase method of accounting and included PathoGenesis' operating results, including the seven business days from
September 21 to 30, 2000, in its consolidated operating results beginning on October 1, 2000. PathoGenesis' operating results for the seven business days in September 2000 were
not significant to the Company's consolidated operating results. PathoGenesis is now part of the Company's biopharmaceuticals segment.

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On December 29, 1997, Chiron completed the sale of its ophthalmics business ("Chiron Vision") to Bausch & Lomb ("B&L"), and on November 30, 1998,
Chiron completed the sale of itsin vitrodiagnostics business ("Chiron Diagnostics") to Bayer Corporation ("Bayer"). The Company's Condensed
Consolidated Statements of Operations reflect the after-tax results of Chiron Vision and Chiron Diagnostics as discontinued operations.

Results of Operations

Biopharmaceuticals

Product salesFor the three months ended March 31, 2001 and 2000, biopharmaceutical product sales were
$78.1 million and $40.7 million, respectively. Biopharmaceutical product sales in 2001 consisted principally of Proleukin® (aldesleukin), Betaseron®,
TOBI® (tobramycin solution for inhalation), PDGF and DepoCyt®. Biopharmaceutical product sales in 2000 consisted principally of Proleukin® and
Betaseron®.

Proleukin®Chiron sells Proleukin® directly in the U.S. and certain international markets. For
the three months ended March 31, 2001 and 2000, sales of Proleukin® were $19.6 million and $19.2 million, respectively. Proleukin® product sales in 2001 as
compared with 2000 primarily were affected by fluctuations in wholesaler inventory management practices and, to a lesser extent, a weaker exchange rate of the Euro as compared with the U.S. dollar.
The Company expects these factors, including the increasing cost sensitivity from reimbursement authorities, particularly in Europe, to continue throughout 2001. The Company continues to pursue the
use of Proleukin® for additional indications, including human immunodeficiency virus ("HIV").

Betaseron®Chiron manufactures Betaseron® for Berlex and its parent company, Schering AG of
Germany. Chiron earns a payment for Betaseron® upon shipment to Berlex and Schering AG, and a subsequent additional payment based on a contractual percentage of sales made by Berlex and
Schering AG. The Company also earns royalties on Schering AG's European sales of Betaferon® (collectively, "Betaseron®
revenues").Accordingly, Chiron's revenues from Betaseron® tend to fluctuate based upon the inventory management practices of Berlex and
Schering AG. In the fourth quarter 2003, the contractual percentage will decrease by 5%.

For
the three months ended March 31, 2001 and 2000, Betaseron® product sales were $20.0 million and $18.7 million, respectively. As discussed in
"Royalties and license fee revenues" below, Betaseron® royalties also increased in 2001 as compared with 2000. The increase in Betaseron® revenues in 2001 as compared with 2000
primarily was related to (i) increased utilization of beta interferon therapy for secondary progressive multiple sclerosis; (ii) fluctuations in Berlex and Schering AG's inventory
management practices; and (iii) increased underlying purchases by end users in Europe and the U.S.

TOBI®Chiron obtained TOBI® as part of its acquisition of PathoGenesis on September 21,
2000. Chiron sells TOBI® directly in the U.S. and certain international markets. TOBI® was approved for cystic fibrosis lung infections by the Food and Drug Administration
("FDA") in December 1997 and was launched commercially in January 1998. In addition, TOBI® was approved in Canada in February 1999. TOBI® also cleared the
mutual recognition process required for marketing in the European Union in August 2000 and was subsequently approved in France, Sweden, Denmark, Portugal, Germany, the United Kingdom and Italy.
Chiron recorded TOBI® sales of $32.5 million for the three months ended March 31, 2001. Sales of TOBI® reported by PathoGenesis were $19.4 million for the
three months ended March 31, 2000. The growth was due to increased TOBI® use in the U.S. and Canada by patients with cystic fibrosis and TOBI® sales related to the
launch in France and Portugal, as well as fluctuations in wholesaler inventory management practices. The Company continues to pursue the use of TOBI® to treat other serious lung
infections. The Company also continues to seek approval in other countries. Future TOBI®

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sales may be influenced by wholesaler inventory management practices and foreign currency exchange rate fluctuations.

PDGFChiron manufactures PDGF for Ortho-McNeil, a J&J company. Accordingly, Chiron's sales of PDGF fluctuate based upon
the inventory management practices of Ortho-McNeil. PDGF is the active ingredient in Regranex® (becaplermin) Gel, a treatment for diabetic foot ulcers. Regranex® Gel was
approved by the FDA in December 1997 and was launched commercially in early 1998. Regranex® Gel was approved for use in the treatment of diabetic foot ulcers in Canada in
December 1998 and Europe in March 1999. Net sales of PDGF were $3.1 million for the three months ended March 31, 2001. The increase in PDGF product sales primarily was due
to the resumption of commercial shipments to Ortho-McNeil. As Chiron's 1998 sales had filled Ortho-McNeil's inventory requirements, there were no commercial shipments of PDGF to Ortho-McNeil from the
first quarter 1999 through the first quarter 2000.

DepoCyt®The Company develops DepoCyt®, a treatment for lymphomatous meningitis, in a
collaboration with SkyePharma. In October 1999, SkyePharma, the manufacturer of DepoCyt®, discovered and recalled two DepoCyt® lots that did not meet manufacturing
specifications. The commercial supply of this product was on hold while the Company and SkyePharma worked with the FDA to resolve various issues related to the manufacture of the product. In
October 2000, the Company submitted a request for FDA approval to relaunch DepoCyt®. In the first quarter 2001, the FDA granted clearance for the Company and SkyePharma to
recommercialize DepoCyt®. Sales of DepoCyt® were $0.5 million for the three months ended March 31, 2001.

The
Company expects competitive pressures related to many of its biopharmaceutical products to continue into the foreseeable future, primarily as a result of the introduction of
competing products into the market, as listed in Part I, Item 1., "BusinessCompetition" of the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.

Collaborative agreement revenuesChiron recognizes collaborative agreement revenues for fees received as research
services are performed and as specified milestones are achieved. Up-front refundable fees are deferred and recognized as revenues when they become nonrefundable or when performance
obligations are completed. Up-front nonrefundable fees where the Company has no continuing performance obligations are recognized as revenues when receivable. In situations where
continuing performance obligations exist, up-front nonrefundable fees are deferred and amortized over the performance period. For the three months ended March 31, 2001 and 2000, the
biopharmaceuticals segment recognized collaborative agreement revenues of $5.5 million and $3.2 million, respectively.

Novartis AGUnder the terms of a November 1995 agreement with Novartis, Chiron granted Novartis a license to
utilize Chiron's combinatorial chemistry techniques. In exchange for this license, Novartis agreed to pay Chiron $26.0 million over a five-year period, subject to certain
adjustments. In addition, this agreement provides for research funding by Novartis, and certain up-front milestone and royalty payments, as well as product commercialization rights for
both parties. In connection with this agreement, Chiron recognized collaborative agreement revenues of $0.5 million for the three months ended March 31, 2000. This agreement expired in
the fourth quarter 2000.

In
November 1996, Chiron and Novartis entered into a consent order with the Federal Trade Commission pursuant to which Chiron agreed to grant a royalty-bearing license to
Rhone-Poulenc Rorer, Inc. under certain Chiron patents related to the Herpes Simplex Virus-thymidine kinase ("HSV-tk") gene in the field of gene therapy. Chiron and Novartis entered
into a separate agreement which provided, among other things, for certain cross licenses between Chiron and Novartis, and under which Novartis agreed to pay
Chiron up to $60.0 million over five years. In connection with this agreement, Chiron recognized collaborative agreement revenues of $2.5 million for both of the three months ended
March 31, 2001 and 2000.

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The Company's "Other" segment also earns collaborative agreement revenues under a third Novartis agreement. See "OtherCollaborative agreement revenues" below.

S*BIOIn the second quarter 2000, the Company invested in a Singapore-based venture, S*BIO Pte Ltd ("S*BIO"), to
research and develop therapeutic, diagnostic, vaccine and antibody products. The Company also granted to S*BIO certain rights to the Company's gene expression and combinatorial chemistry technology.
Under this arrangement, the Company will receive $22.0 million over two years for technology transfer. For the three months ended March 31, 2001, the Company recognized collaborative
agreement revenues of $2.8 million under this arrangement. In addition, the Company will receive certain milestone payments and various royalties on future product sales if S*BIO commercializes
a product using the Company's gene expression and combinatorial chemistry technology. However, there can be no assurance that S*BIO will meet its development objectives or commercialize a product
using Chiron's gene expression and combinatorial chemistry technology.

The
balance of collaborative agreement revenues recognized by the biopharmaceuticals segment consisted of various other agreements, which individually were not significant.

Collaborative
agreement revenues tend to fluctuate based on the amount of research services performed, the status of projects under collaboration and the achievement of milestones.
Due to the nature of the Company's collaborative agreement revenues, results in any one period are not necessarily indicative of results to be achieved in the future. The Company's ability to generate
additional collaborative agreement revenues may depend, in part, on its ability to initiate and maintain relationships with potential and current collaborative partners. In particular, the
November 1996 consent agreement between Chiron, Novartis and the Federal Trade Commission expires in the fourth quarter 2001. There can be no assurance that new relationships will be
established or that current collaborative agreement revenues will not decline.

Royalty and license fee revenuesThe biopharmaceuticals segment earns royalties on third party sales of several
products, including Betaferon®, recombinant insulin and glucagon products, as well as license fees for technologies, such as hepatitis C virus ("HCV") patents, used by third parties.
Up-front refundable fees are deferred and recognized as revenues when they become nonrefundable or when all performance obligations are completed. Up-front nonrefundable
license fees where the Company has no continuing performance obligations are recognized as revenues when receivable. In situations where continuing performance obligations exist, up-front
nonrefundable license fees are deferred and amortized over the performance period. For the three months ended March 31, 2001 and 2000, the biopharmaceuticals segment recognized royalty and
license fee revenues of $15.6 million and $12.7 million, respectively.

Betaferon®The Company earns royalties on Schering AG's European sales of Betaferon®. For the
three months ended March 31, 2001 and 2000, Chiron recognized $9.9 million and $7.5 million, respectively, under this arrangement. As discussed in "Product
salesBetaseron®" above,the increase in 2001 as compared with 2000 primarily was related to increased utilization of beta
interferon therapy, offset by a weaker exchange rate of the Euro as compared with the U.S. dollar. Betaferon® is the only product that is approved for the treatment of both relapsing
remitting and secondary progressive ("SPMS") multiple sclerosis in Europe.

GlaxoUnder a 2000 agreement with Glaxo Group Limited (now part of GlaxoSmithKline), Chiron granted to GlaxoSmithKline
rights under certain Chiron HCV patents, for which the Company recognized a license fee in the first quarter 2000. The agreement provides for certain milestone payments and minimum annual royalties.
If GlaxoSmithKline commercializes products using Chiron's HCV patents, the agreement provides for royalties on future product sales, against which the minimum annual royalties will be applied.
However, there can be no assurance that GlaxoSmithKline will meet such development

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objectives or commercialize a product using Chiron's HCV patent rights. The Company did not recognize any revenue under this agreement for the three months ended March 31, 2001.

Japan TobaccoIn January 2001, Chiron granted to Japan Tobacco, Inc. ("Japan Tobacco") rights under
certain Chiron HCV patents. The agreement provides for the payment of a license fee, which was received and recognized as revenue in the first quarter 2001, and minimum annual royalties. If Japan
Tobacco commercializes products using Chiron's HCV patents, the agreement provides for royalties on future product sales. However, there can be no assurance that Japan Tobacco will meet such
development objectives or commercialize a product using Chiron's HCV patents.

OtherChiron estimates recombinant insulin and glucagon royalty revenues based on previous period actual recombinant
insulin and glucagon product sales. For the three months ended March 31, 2001 and 2000, Chiron recognized $1.8 million and $1.5 million, respectively, under this arrangement.

The
balance of royalty and license fee revenues recognized by the biopharmaceuticals segment consisted of various other agreements, which individually were not significant.

Royalty
and license fee revenues may fluctuate based on the nature of the related agreements and the timing of receipt of license fees. In addition, Chiron estimates royalty revenues
based on product sales estimates provided by the third party or previous period actual product sales. In the subsequent quarter, Chiron records an adjustment equal to the difference between those
estimated royalty revenues recorded in the previous quarter and the contractual percentage of the third party's actual product sales for that period. Results in any one period are not necessarily
indicative of results to be achieved in the future. In addition, the Company's ability to generate additional royalty and license fee revenues
may depend, in part, on its ability to market and capitalize on its technologies. There can be no assurance that the Company will be able to do so or that future royalty and license fee revenues will
not decline.

Other revenuesFor the three months ended March 31, 2001 and 2000, the biopharmaceuticals segment recognized
other revenues of $0.5 million and $1.5 million, respectively.

Contract manufacturing revenuesFor the three months ended March 31, 2001 and 2000, the biopharmaceuticals
segment recognized contract manufacturing revenues of $0.3 million and $1.2 million, respectively. The decrease resulted from the timing of contract manufacturing activities. The Company
anticipates that there will be increased contract manufacturing activities for the year-to-date 2001 as compared with 2000, as we seek to improve utilization of manufacturing
capacity.

The
balance of other revenues recognized by the biopharmaceuticals segment consisted of various other arrangements, which individually were not significant.

Biopharmaceuticals'
other revenues may fluctuate due to the nature of the revenues recognized and the timing of events giving rise to these revenues. There can be no guarantee that
the Company will be successful in obtaining additional revenues or that these revenues will not decline.

Gross profitFor the three months ended March 31, 2001 and 2000, biopharmaceutical gross profit as a percentage
of net product sales was 77% and 67%, respectively. The increase in biopharmaceutical gross profit margins in 2001 as compared with 2000 primarily was related to a more favorable mix of
biopharmaceutical product sales, including TOBI®.

Biopharmaceutical
gross profit percentages may fluctuate significantly in future periods as the biopharmaceutical product mix changes.

Research and developmentFor the three months ended March 31, 2001 and 2000, the biopharmaceuticals segment
recognized research and development expenses of $65.0 million and $51.8 million, respectively. The increase in research and development spending in 2001 as compared with 2000 was due to
the furtherance of the Company's clinical trials related to Proleukin® for HIV, tifacogin

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(recombinant Tissue Factor Pathway Inhibitor or "TFPI") for severe sepsis and progress in various other development platforms, including those obtained as part of the acquisition of PathoGenesis on
September 21, 2000. The increases were offset by the timing of various other clinical trials, including
Fibroblast Growth Factor ("FGF") for coronary and peripheral artery diseases, and a reduction in gene therapy activities with the sale of the San Diego facility in January 2001 (see "Gain
(loss) on sale of assets" below).

Research
and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial-related
activities.

Selling, general, and administrativeFor the three months ended March 31, 2001 and 2000, the biopharmaceuticals
segment recognized selling, general and administrative ("SG&A") expenses of $21.5 million and $10.4 million, respectively. The increase primarily was due to the acquisition of
PathoGenesis. The remaining increase in SG&A expenses in 2001 as compared with 2000 primarily was due to increased sales and marketing costs related to the relaunch of DepoCyt® in the
first quarter 2001.

Vaccines

Product salesChiron sells pediatric and adult vaccines in Germany, Italy, the United Kingdom and other international
markets. Certain of the Company's vaccine products, particularly its flu vaccine, are seasonal and typically have higher sales in the second half of the year. For the three months ended
March 31, 2001 and 2000, vaccine product sales were $77.7 million and $109.8 million, respectively.

The
decrease in product sales in 2001 as compared with 2000 primarily was due to sales of Menjugate, Chiron's conjugate vaccine against meningococcal meningitis caused by
the bacterium N. meningitidis serogroup C, which amounted to $29.4 million and $60.4 million for the three months ended March 31, 2001 and 2000, respectively. In the first quarter
2000, the Company shipped $60.4 million of Menjugate to the National Health Service ("NHS") under a tender to begin a universal vaccination program in the United Kingdom. As of
March 31, 2001, the Company has remaining tenders in various countries to ship approximately $37.2 million of Menjugate through the second quarter 2002. The Company expects
Menjugate sales to continue to be influenced by the timing of shipments under tender. The Company is exploring opportunities for additional Menjugate sales in other
countries; however, the Company does not expect Menjugate shipments in 2001 to be commensurate with those in 2000. Sales of all other vaccine products were $48.3 million and
$49.4 million for the three months ended March 31, 2001 and 2000, respectively.

In
January 2000, the Company entered into a co-marketing and co-promotion agreement ("AVP agreement") with Aventis Pasteur related to
Menjugate and Fluad. Under the AVP agreement, Aventis Pasteur will distribute, market and sell (co-market) Menjugate under its own label in Europe,
excluding the United Kingdom and Ireland, and will assist the Company in marketing and sales efforts (co-promotion) related to Menjugate in the United Kingdom and Ireland.
Aventis Pasteur will similarly co-market and co-promote Fluad in Europe. For both the three months ended March 31, 2001 and 2000,
co-marketing, which was recorded as a reduction to product sales, amounted to less than $0.1 million. For discussion on the co-promotion, see "Selling, general and
administrative" below.

The
Company expects competitive pressures related to many of its vaccine products to continue into the foreseeable future, primarily as a result of the introduction of competing
products into the market, including new combination vaccines.

Royalty and license fee revenuesThe vaccines segment earns royalties on third party sales of and license fees on
several products. Up-front refundable fees are deferred and recognized as revenues when they become nonrefundable or when all performance obligations are completed. Up-front
nonrefundable license fees where the Company has no continuing performance obligations are recognized as revenues when receivable. In situations where continuing performance obligations exist,
up-front nonrefundable

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license fees are deferred and amortized over the performance period. For the three months ended March 31, 2001 and 2000, the vaccines segment recognized royalty and license fee revenues of
$4.7 million and $6.7 million, respectively.

SmithKline BeechamAn agreement with SmithKline Beecham (now part of GlaxoSmithKline) provides for royalties on sales
of certain vaccine products. Under this agreement, Chiron recognized $1.6 million and $1.8 million of such royalties for the three months ended March 31, 2001 and 2000,
respectively. The decrease in 2001 as compared with 2000 primarily was due to a decrease in GlaxoSmithKline sales due to competitive vaccine products.

OtherUnder one arrangement, Chiron recognized $0.8 million and $2.2 million of royalty revenues on third
party sales of hepatitis B virus ("HBV") vaccine products for the three months ended March 31, 2001 and 2000, respectively. The decrease in 2001 as compared with 2000 primarily was due to a
decrease in sales of the HBV vaccine products due to competitive HBV vaccine products. Under another arrangement, the Company also earns royalties on third party sales of HBV products. Royalty
revenues recognized under this HBV royalty arrangement were $2.3 million and $2.7 million for the three months ended March 31, 2001 and 2000, respectively.

Royalty
and license fee revenues may fluctuate based on the nature of the related agreements and the timing of receipt of license fees. Results in any one period are not necessarily
indicative of results to be achieved in the future. In addition, the Company's ability to generate additional royalty and license fee revenues may depend, in part, on its ability to market and
capitalize on its technologies. There can be no assurance that the Company will be able to do so or that future royalty and license fee revenues will not decline.

Other revenuesFor the three months ended March 31, 2001 and 2000, the vaccines segment recognized other
revenues of $3.3 million and $4.3 million, respectively.

Commission revenuesThe Company earns commission revenues on sales of HBV vaccine and immunoglobulin products.
Commission revenues were $0.8 million and $1.9 million for the three months ended March 31, 2001 and 2000, respectively. The decrease in commission revenues in 2001 as compared
with 2000 primarily was related to a decrease in sales of the HBV vaccine products due to competitive HBV vaccine products and the expiration of the immunoglobulin arrangement on December 31,
2000.

National Institutes of HealthIn the second quarter 2000, the Company entered into an agreement with the National
Institutes of Health ("NIH") to advance its HIV vaccine program into human clinical trials. Under this arrangement, the Company could receive $23.2 million over five years. Under a supplemental
arrangement with NIH, the Company may perform other work related to NIH's HIV vaccine program on a contract-by-contract basis. The Company recognized $0.4 million for
the three months ended March 31, 2001 under these arrangements.

The
balance of other revenues recognized by the vaccines segment consisted of various other agreements, which individually were not significant.

Vaccines'
other revenues may fluctuate due to the nature of the revenues recognized and the timing of events giving rise to these revenues. There can be no guarantee that the Company
will be successful in obtaining additional revenues or that these revenues will not decline.

Gross profitFor the three months ended March 31, 2001 and 2000, vaccine gross profit as a percentage of net
product sales was 64% and 73%, respectively. The decrease in vaccine gross profit margins in 2001 as compared with 2000 primarily was related to sales of Menjugate, offset by a favorable
mix of other vaccine product sales. A significant portion of Menjugate production occurred in 1999. As the Company had not received approval to market Menjugate as of the end
of fiscal year 1999, the

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Company expensed manufacturing costs to research and development. The Company does not expect vaccine gross profit margins in following quarters to be commensurate with those in the first quarter
2000.

Vaccine
gross profit percentages may fluctuate significantly in future periods as the vaccine product mix changes.

Research and developmentFor the three months ended March 31, 2001 and 2000, the vaccines segment recognized
research and development expenses of $15.4 million and $15.3 million, respectively.

In
April 2001, Chiron, Rhein Biotech N.V. ("Rhein Biotech") and GreenCross Vaccine Corporation ("GCVC") entered into a collaboration to research and develop certain pediatric
combination vaccine products for sale outside of Europe and North America. Under the collaboration agreement, the Company will share the research and development expenses with Rhein Biotech and GCVC.
The Company began recognizing research and development expenses under the collaboration agreement in the second quarter 2001. The collaboration agreement also requires capital commitments from Chiron,
Rhein Biotech and GCVC. Chiron's commitment is approximately $22.6 million, primarily for the expansion of its Italian manufacturing facilities (see "Liquidity and Capital
ResourcesSources and uses of cash" below). In connection with the collaboration agreement, Chiron, Rhein Biotech and GCVC also entered into a supply agreement and a manufacturing
agreement, which will be effective should a vaccine under collaboration be commercialized. Under the supply agreement, Chiron will supply Rhein Biotech and GCVC with vaccine products. Under the
manufacturing agreement, Rhein Biotech and GCVC will perform contract manufacturing services for the Company. The agreements contemplate future negotiation that may result in the extension and
expansion of this relationship.

Research
and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial-related
activities.

Selling, general, and administrativeFor the three months ended March 31, 2001 and 2000, the vaccines segment
recognized SG&A expenses of $16.9 million and $18.2 million, respectively. The decrease in SG&A expenses in 2001 as compared with 2000 primarily was due to a weaker exchange rate of the
Euro as compared with the U.S. Dollar, offset by commissions recognized under the AVP agreement. As discussed in "Product sales" above, the Company entered into the AVP agreement related to
Menjugate and Fluad. Under the AVP agreement, Aventis Pasteur will assist the Company in marketing and sales efforts (co-promotion) related to
Menjugate in the United Kingdom and Ireland and Fluad in Europe. For the three months ended March 31, 2001, co-promotion commissions to Aventis Pasteur
amounted to $1.3 million.

Amortization expenseThe vaccines segment recognized amortization expense of $2.0 million and
$2.1 million for the three months ended March 31, 2001 and 2000, respectively. In the second quarter 1998, Chiron acquired the remaining 51% interest in Chiron Behring from Hoechst AG
and accounted for the acquisition under the purchase method of accounting (for additional information, see Note 5, "Acquisition of Chiron Behring," of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000). A portion of the purchase price was allocated to acquired intangible assets and goodwill, which are being amortized on a
straight-line basis over the estimated useful life of each intangible asset. Acquired intangible assets included the fair value of trademarks, patents and customer lists, which are being
amortized on a straight-line basis over 4 to 17 years. Goodwill is being amortized on a straight-line basis over 17 years. Chiron will evaluate periodically the
useful life and value of each intangible asset, which may result in future adjustments to the amortization periods or book values.

Blood testing

Product salesFor the three months ended March 31, 2001 and 2000, the blood testing segment recognized product
sales of $13.0 million and $7.1 million, respectively.

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OrthoUnder the Ortho arrangement, the Company performs manufacturing services related to immunodiagnostic products.
For the three months ended March 31, 2001 and 2000, the Company recognized product sales under this agreement of $4.8 million and $4.2 million, respectively. The fluctuation
between 2001 and 2000 primarily was due to the timing of manufacturing services.

NATUnder the collaboration agreement with Gen-Probe, Chiron and Gen-Probe are jointly
participating in new assay and instrument research and development. Currently, Gen-Probe is the only manufacturer of NAT products using TMA technology. Worldwide product sales related to
tests and instruments were $8.2 million and $2.9 million for the three months ended March 31, 2001 and 2000, respectively.

The
Company has contracts with various agencies and distributors worldwide. In addition, evaluation studies are being conducted to consider the adoption of NAT for blood screening in
different countries. Product revenues are recognized based on the details of each contractfrom co-development or cost recovery pricing for Investigational New Drug ("IND")
applications to contracted price per donation.

In
the U.S., the Company began recognizing revenues from sales of nucleic acid tests under an IND application in the second quarter 1999. In the second quarter 2000, the Company
signed a contract with the U.S. military to test U.S. Army blood donations using the Chiron Procleix HIV-1/HCV assay. In the third quarter 2000, (i) the Company assumed
primary account responsibility for a key U.S. customer, which resulted in increased product sales, and (ii) the Company's remaining U.S. customers renewed their agreements, with price
increases, for NAT products. In January 2001, Chiron and Gen-Probe completed submission of data to the FDA for the Procleix HIV-1/HCV assays. There can be
no assurance as to the receipt of FDA approval or the timing of any such approval.

In
France, the French government has announced its intention to adopt NAT for blood screening by the end of the second quarter 2001. In 2000, the Company began recognizing revenue for
assay sales and instrument rentals to several regional blood testing centers in France in connection with evaluation studies, which were completed in the second quarter 2000. The Company expects to
begin recognizing revenues from commercial sales, based on a contracted price per donation, in the third quarter 2001.

In
Australia, the Company signed, and began recognizing revenue under, an exclusive contract with the Australian Red Cross Blood Service to provide blood testing products for NAT
screening in the fourth quarter 1999. In Singapore, the Company signed a contract with a local distributor in the second quarter 2000 to provide blood testing products for NAT screening and began
recognizing product sales in the first quarter 2001.

The
Company expects competitive pressures related to many of its blood testing products to continue into the foreseeable future, primarily as a result of the introduction of competing
products into the market, as listed in Part I, Item 1., "BusinessCompetition" of the Company's Annual Report on Form 10-K for the year ended December 31,
2000.

Equity in earnings of unconsolidated joint businessesFor the three months ended March 31, 2001 and 2000,
Chiron's earnings from its joint business with Ortho were $15.6 million and $15.7 million, respectively.

Collaborative agreement revenuesChiron recognizes collaborative agreement revenues for fees received as research
services are performed and as specified milestones are achieved. Up-front refundable fees are deferred and recognized as revenues when they become nonrefundable or when performance
obligations are completed. Up-front nonrefundable fees where the Company has no continuing performance obligations are recognized as revenues when receivable. In situations where
continuing performance obligations exist, up-front nonrefundable fees are deferred and amortized over the performance period. For both of the three months ended March 31, 2001 and
2000, the blood testing segment recognized collaborative agreement revenues of $3.6 million.

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Under the Ortho arrangement, the Company conducts research and development services related to immunodiagnostic products. For the three months ended March 31, 2001 and 2000,
the Company recognized revenues under this agreement of $3.5 million and $2.9 million, respectively. The fluctuation between 2001 and 2000 primarily was due to the timing of research
services.

The
balance of collaborative agreement revenues recognized by the blood testing segment consisted of various other agreements, which individually were not significant.

Collaborative
agreement revenues tend to fluctuate based on the amount of research services performed, the status of projects under collaboration and the achievement of milestones.
Due to the nature of the Company's collaborative agreement revenues, results in any one period are not necessarily indicative of results to be achieved in the future. The Company's ability to generate
additional collaborative agreement revenues may depend, in part, on its ability to initiate and maintain
relationships with potential and current collaborative partners. There can be no assurance that such relationships will be established or that current collaborative agreement revenues will not
decline.

Royalty and license fee revenuesThe blood testing segment earns royalties on blood donations tested with third party
NAT products that utilize certain of Chiron's HCV and HIV patents. Up-front refundable fees are deferred and recognized as revenues when they become nonrefundable or when all performance
obligations are completed. Up-front nonrefundable license fees where the Company has no continuing performance obligations are recognized as revenues when receivable. In situations where
continuing performance obligations exist, up-front nonrefundable license fees are deferred and amortized over the performance period.

In
the fourth quarter 2000, the Company entered into three agreements with F. Hoffman La-Roche AG and several of its affiliated companies (collectively, "Roche") related
to the settlement of certain litigation in the U.S. and certain other countries. Under one of the agreements, Chiron earns royalties on blood donations tested with Roche's NAT products that utilize
Chiron's HCV and HIV patents. The Company will recognize revenue under this arrangement through 2003. The agreement contemplates future negotiation that may result in the extension and expansion of
this relationship. Revenues under this arrangement were $2.6 million for the three months ended March 31, 2001. The blood testing segment did not recognize any royalty and license fee
revenues during the three months ended March 31, 2000.

The
Company's "Other" segment also earns royalty and license fee revenues under the other two Roche agreements. See "OtherRoyalty and license fee revenues" below.

Royalty
and license fee revenues may fluctuate based on the nature of the related agreements and the timing of receipt of license fees. Results in any one period are not necessarily
indicative of results to be achieved in the future. In addition, the Company's ability to generate additional royalty and license fee revenues may depend, in part, on its ability to market and
capitalize on its technologies. There can be no assurance that the Company will be able to do so or that future royalty and license fee revenues will not decline.

Gross profitFor the three months ended March 31, 2001 and 2000, blood testing gross profit as a percentage of
net product sales was 34% and 2%, respectively. The increase in blood testing gross profit margins in 2001 as compared with 2000 primarily was related to a favorable mix of blood testing product
sales. As discussed in "Product sales" above, Chiron began recognizing NAT product sales for one of its key U.S. customers, which previously were recorded as collaborative agreement revenues, in
July 2000, and the remaining U.S. customers renewed their agreements during the third quarter 2000, which resulted in price increases for NAT products.

Blood
testing gross profit percentages may fluctuate significantly in future periods as the blood testing product mix changes.

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Research and developmentFor the three months ended March 31, 2001 and 2000, the blood testing segment
recognized research and development expenses of $4.3 million and $3.9 million, respectively. The increase in research and development spending in 2001 as compared with 2000 was due to a
slight increase in development costs related to the NAT business, as Chiron and Gen-Probe completed submission of data to the FDA for the Procleix instruments and assays in
January 2001 (see "Product sales" above).

Research
and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial-related
activities.

Selling, general, and administrativeFor the three months ended March 31, 2001 and 2000, the blood testing
segment recognized SG&A expenses of $7.0 million and $4.0 million, respectively. The increase in SG&A expenses in 2001 as compared with 2000 primarily was due to expenses associated with
the NAT business. The Company expects continued growth in SG&A expenses related to the NAT business as the Company explores opportunities for additional NAT adoptions in other countries.

Other

Collaborative agreement revenuesChiron recognizes collaborative agreement revenues for fees received as research
services are performed and as specified milestones are achieved. Up-front refundable fees are deferred and recognized as revenues when they become nonrefundable or when performance
obligations are completed. Up-front nonrefundable fees where the Company has no continuing performance obligations are recognized as revenues when receivable. In situations where
continuing performance obligations exist, up-front nonrefundable fees are deferred and amortized over the performance period. For the three months ended March 31, 2001 and 2000, the
other segment did not recognize any collaborative agreement revenues.

Novartis AGIn December 1995, Chiron and Novartis entered into an agreement under which Novartis agreed to provide, at Chiron's
request, research funding for certain projects. The funded projects currently consist of adult and pediatric vaccines, Insulin-Like Growth Factor-I ("IGF-I"),
Factor VIII and HSV-tk. Based upon a December 2000 amendment, Novartis has agreed to fund through December 31, 2001, at Chiron's request and subject to certain annual and
aggregate limits, up to 100% of the development costs incurred between January 1, 1995 and December 31, 2000 on these projects. In December 1999, Chiron and Novartis amended this
agreement to increase the aggregate maximum
amount of funding provided by Novartis from $250.0 million to $265.0 million. Under this agreement, Chiron did not recognize any collaborative agreement revenues for the three months
ended March 31, 2001 and 2000. In 2001, the amount of funding available to be provided by Novartis is limited to $9.1 million.

Collaborative
agreement revenues tend to fluctuate based on the amount of research services performed, the status of projects under collaboration and the achievement of milestones.
Due to the nature of the Company's collaborative agreement revenues, results in any one period are not necessarily indicative of results to be achieved in the future. The Company's ability to generate
additional collaborative agreement revenues may depend, in part, on its ability to initiate and maintain relationships with potential and current collaborative partners. There can be no assurance that
such relationships will be established or that current collaborative agreement revenues will not decline. In particular, the research funding agreement with Novartis will expire on December 31,
2001, and there can be no assurance that new relationships will be established.

Royalty and license fee revenuesThe other segment earns royalties on third party sales of and license fees on several
products. Up-front refundable fees are deferred and recognized as revenues when they become nonrefundable or when performance obligations are completed. Up-front nonrefundable
fees where the Company has no continuing performance obligations are recognized as revenues when receivable. In situations where continuing performance obligations exist, up-front
nonrefundable fees are deferred and amortized over the performance period. For the three months ended March 31, 2001 and

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2000, the other segment recognized royalty and license fee revenues of $39.3 million and $11.6 million, respectively.

Roche PCR AgreementIn accordance with a July 1991 agreement with Roche, the Company receives royalties on sales
of polymerase chain reaction ("PCR") products sold by Roche. The Company recognized $2.6 million and $3.3 million under this agreement for the three months ended March 31, 2001
and 2000, respectively. Roche's royalty obligations, with certain limited exceptions for future products, expired in the fourth quarter 2000. However, Chiron estimates royalties on PCR product sales
based on previous period actual sales. In the following quarter, Chiron records an adjustment equal to the difference between those estimated royalty revenues recorded in the previous quarter and the
contractual percentage of actual PCR product sales for that period. As a result, Chiron recorded the adjustment for the final fourth quarter 2000 royalties in the first quarter 2001.

Bayer Cross-License AgreementIn connection with the sale of Chiron Diagnostics to Bayer, Chiron granted to Bayer
rights under certain Chiron patents, including rights under patents relating to HIV and HCV. In exchange for these rights, Bayer paid to Chiron a license fee of $100.0 million, which becomes
nonrefundable over a period of three years. For the three months ended March 31, 2001 and 2000, Chiron recognized license fee revenues of $5.0 million and $7.5 million,
respectively, which represent the portions of the $100.0 million payment that became nonrefundable during those periods. In addition, the cross-license agreement provides for royalties to
Chiron on HIV and HCV products
sold by Bayer. For the three months ended March 31, 2001and 2000, Chiron recognized $0.7 million and $0.8 million, respectively, of royalty revenues related to this agreement.

Roche SettlementIn the fourth quarter 2000, the Company entered into three agreements with Roche related to the
settlement of litigation in the U.S. and certain other countries.

Under
the first agreement, Chiron was paid $85.0 million, of which $40.0 million was recognized in the fourth quarter 2000. Of the $40.0 million,
$34.0 million was for past sales and $6.0 million was for current sales related to Roche's use of Chiron's HCV patents in itsin vitrodiagnostic products. The remaining $45.0 million, which was deferred and becomes nonrefundable over time, will be recognized as revenue through 2005 as royalties on future sales related to
Roche's use of Chiron's HCV patents in itsin vitrodiagnostic products. For the three months ended March 31, 2001, the Company recognized
$0.9 million of the $45.0 million. The agreement also provides for royalties on future sales related to Roche's use of Chiron's HCV patent in itsin
vitrodiagnostic products, for which the Company recognized an additional $9.0 million of royalty revenue for the three months ended March 31, 2001.

Under
the second agreement, Chiron received $10.0 million in the fourth quarter 2000, which was deferred, and received $10.0 million in the first quarter 2001. These
amounts included a refundable license fee and royalties for past sales related to Roche's use of Chiron's HIV patent in itsin vitrodiagnostic products
in Europe. These amounts became nonrefundable in January 2001 when the European Patent Office upheld the Company's HIV patent, and the Company recognized the entire $20.0 million as
revenue in the first quarter 2001. The agreement also provides for royalties on future sales related to Roche's use of Chiron's HIV patent in itsin
vitrodiagnostic products, for which the Company recognized an additional $1.0 million of royalty revenue for the three months ended March 31, 2001. Also, the
Company will recognize additional revenue of $10.0 million under this arrangement when and if its patents on HIV are issued in the U.S.

Such
royalties will continue through the lives of the HCV and HIV patents. Issued HCV patents begin to expire in 2015 for the U.S. and in 2010 for Europe. The issued HIV patent in
Europe expires in 2005. If issued, the HIV patent life in the U.S. will depend upon the decision by the U.S. patent authorities.

See
"Blood testingRoyalties and license fee revenues" above for a discussion of the third agreement entered into with Roche in the fourth quarter 2000.

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OrganonIn January 2001, Chiron granted to Organon Teknika BV ("Organon") rights under certain Chiron HIV
patents. The agreement provides for royalties on future sales by Organon of assays for the detection of nucleic acid sequences for use inin vitrodiagnostic (excluding blood screening) products.
The Company did not recognize any revenue under this agreement for the three months ended March 31, 2001.

Royalty
and license fee revenues may fluctuate based on the nature of the related agreements and the timing of receipt of license fees. Results in any one period are not necessarily
indicative of results to be achieved in the future. In addition, the Company's ability to generate additional royalty and license fee revenues may depend, in part, on its ability to market and
capitalize on its technologies. There can be no assurance that the Company will be able to do so or that future royalty and license fee revenues will not decline.

Selling, general, and administrativeFor the three months ended March 31, 2001 and 2000, the other segment
recognized SG&A expenses of $13.4 million and $18.3 million, respectively. The decrease in SG&A expenses in 2001 as compared with 2000 primarily was due to lower patent litigation costs
upon substantial conclusion of the Roche litigation in October 2000 and lower payroll taxes related to stock option exercises during a period of lower average Company stock prices. In
March 2000, the Company posted an all-time high in its stock price.

Amortization expenseThe Company's other segment recognized amortization expense of $9.5 million for the three
months ended March 31, 2001. As discussed above, Chiron acquired PathoGenesis on September 21, 2000 and accounted for the acquisition under the purchase method of accounting. A portion
of the purchase price was allocated to purchased technologies, acquired intangible assets and goodwill, which are being amortized on a straight-line basis over the estimated useful life of
each intangible asset. Purchased technologies represented the fair value of research and development projects, which will be developed further and supported after the acquisition date, and are being
amortized on a straight-line basis over 15 years. Acquired intangible assets included the fair value of trademarks and trade names, patents, databases and the work force, which are
being amortized on a straight-line basis over 5 to 16 years. Goodwill is being amortized on a straight-line basis over 15 years. Chiron will evaluate periodically
the useful life and value of each intangible asset, which may result in future adjustments to the amortization periods or book values.

Restructuring and reorganizationThe Company recorded restructuring and reorganization charges related to
(i) the integration of its worldwide vaccines operations, (ii) the closure of its Puerto Rico and St. Louis, Missouri facilities and (iii) the ongoing restructuring of its
business operations. The integration of its worldwide vaccines operations consisted of termination and other employee-related costs recognized in connection with the elimination of 28 positions, all
of which had terminated as of December 31, 2000, in the Company's Italian manufacturing facility and facility-related costs. The closure of its Puerto Rico and St. Louis facilities and the
ongoing restructuring of its business operations consisted of termination and other employee-related costs recognized in connection with the elimination of 400 positions in manufacturing, research,
development, sales, marketing and other administrative functions, and facility-related costs. Employee termination costs included wage continuation, advance notice pay and medical and other benefits.
Facility-related costs included losses on disposal of property, plant and equipment, lease payments and other related costs.

During
1999, the Company decided to retain 18 of those 400 positions to support future contract manufacturing activities and, therefore, adjusted the number of positions for
elimination to 382. Again during 2000, the Company decided to retain 11 of those 382 positions to support future contract manufacturing activities and, therefore, adjusted the number of positions for
elimination to 371. Included in the 371 positions were 36 positions at the Company's Amsterdam facility. These positions were transferred to the buyer in January 2000 in connection with the
December 1999 sale of the Amsterdam facility.

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For the three months ended March 31, 2001, the net restructuring and reorganization activity included a charge of $0.2 million and a charge reversal of
$0.2 million. The charge of $0.2 million primarily related to revised estimates of termination and other employee-related costs recorded in connection with the elimination of the 371
positions, of which 359 had terminated as of March 31, 2001. The charge reversal of $0.2 million primarily related to revised estimates of facility-related costs.

For
the three months ended March 31, 2000, the Company recorded net restructuring and reorganization charge reversals of $0.4 million primarily related to revised
estimates of termination and other employee-related costs recorded in connection with the retention of 11 of the 382 positions. As described above, the Company adjusted the number of positions for
elimination to 371, of which 356 had terminated as of March 31, 2000.

The
restructuring and reorganization accruals are expected to be substantially settled within one to six years of accruing the related charges. Management expects employee and
facility-related cost savings due to these restructuring activities in cost of sales, research and development expense and SG&A expense through 2008. The Company believes that it has begun to achieve
these cost savings.

Gain (loss) on sale of assetsIn January 2001, the Company sold various assets of its San Diego facility,
resulting in a net gain of $2.4 million. In February 2000, the Company sold substantially all assets of its Australian subsidiary, resulting in a net loss of $0.2 million.

Interest expenseFor the three months ended March 31, 2001 and 2000, Chiron recognized interest expense of
$0.4 million and $5.0 million, respectively. The decrease in interest expense in 2001 as compared with 2000 primarily was due to the conversions of $253.8 million of the 1.90%
convertible debentures to common stock in October 2000 and $98.4 million of the 5.25% convertible debentures to common stock in May 2000.

Other income, netOther income, net, primarily consisted of interest income on the Company's cash and investment
balances and other non-operating gains and losses. For the three months ended March 31, 2001 and 2000, Chiron recognized interest income of $13.4 million and
$21.7 million, respectively. The decrease in interest income in 2001 as compared with 2000 primarily was due to lower average cash
and investment balances following the $720.7 million cash payment to purchase PathoGenesis in September 2000 and lower average interest rates. Due to the $720.7 million cash
payment to purchase PathoGenesis and the declining interest rates, the Company does not expect interest income in following periods to be commensurate with 2000.

In
connection with its research and development collaborations, the Company may invest in equity securities of its collaborative partners. The price of these securities is subject to
significant volatility. The Company performs periodic reviews for temporary or other than temporary impairment of its equity securities and records adjustments to the carrying values of those
securities accordingly. For both of the three months ended March 31, 2001 and 2000, Chiron did not recognize any losses attributable to the other-than-temporary
impairment of certain of these equity securities. For the three months ended March 31, 2000, Chiron recognized gains of $0.8 million related to the sale of certain equity securities.

On
December 31, 1998, Chiron completed the sale of its 30% interest in General Injectibles & Vaccines, Inc. ("GIV"), a distribution business, to Henry
Schein, Inc. and received payment in full of certain advances made by the Company to GIV. The agreement also provided for Chiron to receive additional payments, calculated as a
pre-determined percentage of Henry Schein, Inc.'s gross profit, through 2003. For the three months ended March 31, 2001 and 2000, the Company received $2.5 million and
$1.2 million, respectively.

The
Company hedged a portion of its exposure to the British pound in 2000 related to Menjugate sales. For the three months ended March 31, 2000, the Company
recognized an unrealized holding gain of $4.1 million related to this hedge.

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Effective January 1, 2001, the Company implemented SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at
fair value. If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in other comprehensive income and are
recognized in earnings when the underlying exposure affects earnings. Ineffective portions of the changes in the fair value of cash flow hedges are recognized in earnings. If the derivative is
designated as a fair value hedge, the changes in the fair value of the derivative and of the underlying exposure are recognized in earnings. Prior to placement of the fair value hedge, changes in the
fair value of the underlying exposure are recognized in other comprehensive income. For derivative instruments not designated as hedges under SFAS 133, changes in their fair values are
recognized currently in earnings.

On
January 1, 2001, the Company had several equity forward sales contracts, which were classified as fair value hedges under SFAS 133. Under SFAS 133, the change
in the difference between the spot price and the forward price is excluded from the assessment of hedge effectiveness and, accordingly, recognized in earnings along with any hedge ineffectiveness.
Prior to the implementation of SFAS 133,
the Company had been recognizing in earnings the interest stream on the contracts pursuant to SFAS 80. The Company determined that the difference between the change in the fair value of the contracts
(SFAS 133) and the interest stream (SFAS 80) was not material and, therefore, did not record a cumulative adjustment related to the implementation of SFAS 133.

The
Company periodically evaluates the recoverability of its goodwill by comparing the projected undiscounted net cash flows associated with such goodwill against its respective
carrying value. If the carrying value exceeds the projected undiscounted net cash flows, the Company would record a charge to operations to reduce the carrying value to the fair value. The Company did
not record any such charge for the three months ended March 31, 2001 and 2000.

As
circumstances dictate, the Company evaluates the recoverability of its other intangible and long-lived assets by comparing the projected undiscounted net cash flows
associated with such assets against their respective carrying values. If the carrying value exceeds the projected undiscounted net cash flows, the Company would record a charge to operations to reduce
the carrying value to the fair value. The Company did not record any such charge for the three months ended March 31, 2001 and 2000.

Income taxesThe effective tax rate for 2001 is estimated to be approximately 33.5% of pretax income from continuing
operations, which reflects the amortization of goodwill and acquired identifiable intangible assets related to the PathoGenesis acquisition. The effective tax rate may be affected in future periods by
changes in management's estimates with respect to the Company's deferred tax assets and other items affecting the overall tax rate. Income tax expense for the three months ended March 31, 2000
was based on an estimated annual effective tax rate on pretax income from continuing operations of approximately 31.0%.

The
annual reported effective tax rate for 2000 was 84.4% of pretax income from continuing operations and reflected the write-off of purchased in-process
technologies and amortization expense on goodwill and acquired identifiable intangible assets related to the PathoGenesis acquisition.

Discontinued operationsIn a strategic effort to focus on its core businesses of Biopharmaceuticals, Vaccines and Blood
Testing, the Company completed the sale of Chiron Diagnostics and Chiron Vision in

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1998 and 1997, respectively. The "Gain on disposal of discontinued operations" consisted of the following (in thousands):

Three Months
Ended
March 31, 2000Other

$
245Income tax provision


(93
)$
152


Chiron DiagnosticsOn November 30, 1998, Chiron completed the sale of itsin
vitrodiagnostics business to Bayer for $1,013.8 million in cash, subject to certain post-closing adjustments. The results of operations for Chiron
Diagnostics are reported as a discontinued operation for all periods presented in the Condensed Consolidated Statements of Operations. Chiron has provided customary indemnities under the terms of the
Stock Purchase Agreement with Bayer.

Chiron VisionOn December 29, 1997, Chiron completed the sale of all of the outstanding capital stock of Chiron
Vision to B&L for approximately $300.0 million in cash, subject to certain post-closing adjustments. Under the terms of the B&L Agreement, the Company has provided customary
indemnities and, accordingly, reserved for such contractual obligations to indemnify B&L against certain potential claims. For both the three months ended March 31, 2001 and 2000, none of these
contractual obligations expired unused.

The
Company retained certain Chiron Vision assets, including certain Chiron Vision real estate assets (the "real estate assets") with a carrying value of $25.1 million, upon
the completion of the sale. As of both March 31, 2001and December 31, 2000, the remaining real estate assets amounted to $1.9 million. In April 2001, the Company sold these
real estate assets and anticipates that it will recognize a net gain on the sale of these assets in the second quarter 2001.

New Accounting Standard

In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("SFAS 140"). This standard provides accounting and reporting standards for transfers of financial assets and extinguishments of liabilities. In
accordance with SFAS 140, an entity is required to (i) recognize the financial assets it controls and the liabilities it has incurred, (ii) derecognize financial assets when
control has been surrendered and (iii) derecognize liabilities when extinguished. The implementation of SFAS 140 should be accounted for prospectively. SFAS 140 is effective for
transfers of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Company believes that the
implementation of SFAS 140 will not have a material effect on the Company's results of operations and financial position.

Liquidity and Capital Resources

Chiron's capital requirements have generally been funded from operations, cash and investments on hand, debt borrowings and issuance of common stock. Chiron's
cash and investments in marketable debt securities, which totaled $869.1 million at March 31, 2001, are invested in a diversified portfolio of financial instruments, including money
market instruments, corporate notes and bonds, government or government agency securities and other debt securities issued by financial institutions of high credit standing. By policy, the amount of
credit exposure to any one institution is limited; however, these investments are generally not collateralized and primarily mature within three years.

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Sources and uses of cashChiron had cash and cash equivalents of $218.3 million and $380.3 million at
March 31, 2001 and 2000, respectively.

Operating activitiesFor the three months ended March 31, 2001, net cash provided by operating activities was
$48.8 million as compared with $15.5 million for the three months ended March 31, 2000. The increase in cash provided by operating activities largely was due to lower accounts
receivable. The decrease in accounts receivable was driven by the timing of shipments. In the first quarter 2000, approximately $60.4 million of Menjugate was shipped in
March 2000, whereas Menjugate shipments occurred earlier in the first quarter 2001.

Unutilized
net operating loss carryforwards and federal business credits attributed to the acquisition of PathoGenesis amounted to approximately $105.2 million and
$6.0 million, respectively, and are available to offset future domestic taxable income through 2007. As a result, the Company does not expect tax payments in following years to be commensurate
with those in 2000. The actual utilization of the net operating loss carryforwards is restricted pursuant to section 382 of the Internal Revenue Code.

The
Company anticipates that research and development expenditures in 2001 will increase due to the research and development activities that resulted from the acquisition of
PathoGenesis in September 2000. Net cash from operating activities will fund these research and development activities.

Investing activitiesFor the three months ended March 31, 2001, net cash provided by investing activities
consisted of proceeds from the sale and maturity of investments in marketable debt securities of $273.0 million, proceeds from the sale of assets of $4.9 million, proceeds from the sale
of equity securities and interests in affiliated companies of $2.5 million and other sources of cash of $5.5 million.
Cash provided by investing activities was offset by purchases of investments in marketable debt securities of $243.7 million, capital expenditures of $12.3 million, purchases of equity
investments of $3.9 million and cash paid for acquisition costs related to the acquisition of PathoGenesis of $0.5 million. In January 2001, the Company sold various assets of its
San Diego facility for $4.9 million in cash. The purchases of equity securities and interests in affiliated companies consisted of a $3.9 million capital contribution under a limited
partnership agreement. Under the limited partnership agreement, the Company will pay $25.0 million over five years, of which $10.8 million was paid through March 31, 2001, for an
ownership percentage of 23.25% and is accounting for the investment under the equity method of accounting.

For
the three months ended March 31, 2000, net cash provided by investing activities consisted of proceeds from the sale and maturity of investments in marketable debt
securities of $652.0 million, proceeds from the sale of equity securities and interests in affiliated companies of $3.1 million, proceeds from the sale of assets of $1.0 million
and other sources of cash of $6.8 million. Cash provided by investing activities was offset by purchases of investments in marketable debt securities of $500.7 million and capital
expenditures of $11.7 million.

In
February 2001, the Company's Board of Directors approved a $235.0 million capital expansion project, which includes the construction of two buildings and a parking
structure in Emeryville, California. The Company currently is negotiating design and construction services and evaluating various financing alternatives for this capital expansion project.

Under
the April 2001 agreement with Rhein Biotech and GCVC (see "Results of OperationsVaccinesResearch and Development" above), Chiron committed
approximately $22.6 million, primarily for the expansion of its Italian manufacturing facilities, which is scheduled to begin in the second quarter 2001 and continue through 2008. The Company
currently is evaluating various financing alternatives to fund this expansion.

Financing activitiesFor the three months ended March 31, 2001, net cash used in financing activities consisted
of $37.2 million for the acquisition of treasury stock and $1.1 million related to the repayment of debt. Cash used in financing activities was offset by $12.5 million in proceeds
from the reissuance of

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treasury stock, primarily related to stock option exercises and employee stock purchases, $2.6 million in proceeds from put options and $0.2 million in proceeds related to
short-term borrowings.

The
Company's Board of Directors authorized the repurchase of Chiron common stock on the open market to offset the dilution associated with the operation of the Company's stock option
and employee stock purchase plans and the granting of share rights. In February 2001, the Board of Directors approved a 5.0 million share increase. The Board has authorized such
repurchases through February 28, 2002. As of March 31, 2001, the Company may repurchase up to an additional 7.7 million shares of its common stock. In January 2001, the
Company initiated a put option program to support its
ongoing stock repurchase program. Under this program, the Company entered into a contract with a third party to sell put options on Chiron stock, entitling the holder to sell to the Company
0.5 million shares at $44.95 per share on April 19, 2001. In connection with the sale, the Company collected a $2.6 million premium. On April 19, 2001, Chiron's closing
stock price was $47.02. Since the closing stock price was above the stipulated $44.95, the third party elected not to exercise the options.

For
the three months ended March 31, 2000, net cash used in financing activities consisted of $114.3 million related to the acquisition of treasury stock,
$67.9 million related to the repayment of debt, including the note owed to Novartis, and $6.3 million related to short-term borrowings. Cash used in financing activities was
offset by $39.0 million in proceeds from the reissuance of treasury stock primarily related to stock option exercises and employee stock purchases.

The
Company is currently evaluating a number of business development opportunities. To the extent that the Company is successful in reaching agreements with third parties, these
transactions may involve the expenditure of a significant amount of the Company's current investment portfolio.

Borrowing arrangementsUnder a revolving, committed, uncollateralized credit agreement with a major financial
institution, Chiron can borrow up to $100.0 million in the U.S. This credit facility is guaranteed by Novartis under a November 1994 Investment Agreement, provides various interest rate
options and matures in February 2003. There were no borrowings outstanding under this credit facility at March 31, 2001 and December 31, 2000. In December 1999, Chiron and
Novartis amended the November 1994 Investment Agreement to reduce the maximum amount of Chiron obligations that Novartis would guarantee from $725.0 million to $702.5 million.

Chiron
also has uncommitted credit facilities available outside the U.S. One facility is maintained for Chiron's Italian subsidiary and allows for total borrowings of
$60.2 million, which includes a $50.0 million U.S. Dollar denominated portion and a 12.9 million Euro denominated portion ($10.2 million). There were no outstanding
borrowings under this facility at March 31, 2001. At December 31, 2000, $0.1 million was outstanding under this facility. Another facility, which was established in 2000, is
maintained for Chiron's 51%-owned Indian subsidiary and allows for total borrowings of 200 million Indian Rupee ($4.3 million). At March 31, 2001 and December 31, 2000,
$1.4 million and $1.1 million, respectively, were outstanding under this facility.

Euro Conversion

On January 1, 1999, eleven European Union member countries established fixed conversion rates between their existing currencies ("legacy currencies")
and one common currency, the Euro. The legacy currencies will remain as legal tender in the member countries as denominations of the Euro between January 1, 1999 and January 1, 2002. The
Euro is currently traded on currency exchanges and can be used in business transactions. The Company believes that its financial systems are Euro-ready in all material respects and has
completed system upgrades to assist in its Euro-readiness effort. The cost of the upgrades was not material to the Company's results of operations and financial position. The Euro
conversion may have
competitive implications on the Company's pricing strategies. The Company is still in the process of evaluating the effect, if any, that the Euro may have on its product pricing and gross profit
percentages.

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Factors That May Affect Future Results

As a biotechnology company, Chiron is engaged in a rapidly evolving and often unpredictable business. The forward-looking statements contained in this Report
and in other periodic reports, press releases and other statements issued by the Company from time to time reflect management's current beliefs and expectations concerning objectives, plans,
strategies, future performance and other future events. The following discussion highlights some of the factors, many of which are beyond the Company's control, which could cause actual results to
differ.

Promising Technologies Ultimately May Not Prove Successful

The Company focuses its research and development activities on areas in which it has particular strengths and on technologies that appear promising. These
technologies often are on the "cutting edge" of modern science. As a result, the outcome of any research or development program is highly uncertain. Only a very small fraction of such programs
ultimately result in commercial products or even product candidates. Product candidates that initially appear promising often fail to yield successful products. In many cases, preclinical or clinical
studies will show that a product candidate is not efficacious (that is, it does not have the intended therapeutic or prophylactic effect), or that it raises safety concerns or has other side effects
which outweigh the intended benefit. Success in preclinical or early clinical trials (which generally focus on safety issues) may not translate into success in large-scale clinical trials (which are
designed to show efficacy), often for reasons that are not fully understood. And even after a product is approved and launched, general usage or post-marketing studies may identify safety
or other previously unknown problems with the product which may result in regulatory approvals being suspended, limited to narrow indications or revoked, or which may otherwise prevent successful
commercialization.

Regulatory Approvals

The Company is required to obtain and maintain regulatory approval in order to market most of its products. Generally, these approvals are on a
product-by-product and country-by-country basis, and, in the case of therapeutic products, a separate approval is required for each therapeutic
indication. See Part I, Item 1. "Business-Government Regulation" of the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Product candidates
that appear promising based on early, and even large-scale, clinical trials may not receive regulatory approval. The results of clinical trials often are
susceptible to varying interpretations that may delay, limit or prevent approval or result in the need for post-marketing studies.

Manufacturing

Most of the Company's products are biologics. Manufacturing biologic products is complex. Unlike chemical pharmaceuticals, a biologic product generally cannot
be sufficiently characterized (in terms of its physical and chemical properties) to rely on assaying of the finished product alone to ensure that the product will perform in the intended manner.
Accordingly, it is essential to be able to both validate and control the manufacturing process: that is, to show that the process works and that the product is made strictly and consistently in
compliance with that process. Slight deviations anywhere in the manufacturing process, including quality control, labeling and packaging, may result in unacceptable changes in the products that may
result in lot failures or product recalls. Manufacturing processes which are used to produce the (smaller) quantities of material needed for research and development purposes may not be successfully
scaled up to allow production of commercial quantities at reasonable cost or at all. All of these difficulties are compounded when dealing with novel biologic products that require novel manufacturing
processes. Accordingly, manufacturing is subject to extensive government regulation. Even minor changes in the manufacturing process require regulatory approval, which, in turn, may require further
clinical studies.

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Specific to the Company's new product, TOBI® (tobramycin solution for inhalation), the Company relies on others to supply raw materials and to manufacture
TOBI® according to regulatory requirements. Although Chiron believes either one of its two suppliers of bulk powdered tobramycin will be able to supply sufficient quantities to meet its
current needs, Chiron has not entered into long-term supply contracts with the suppliers. Rather, the Company has an agreement for the formulation and packaging of TOBI® for a
minimum term of 10 years. There can be no assurance that Chiron will be able to obtain future supplies of bulk tobramycin on favorable terms, that contract manufacturers will be able to provide
sufficient quantities of TOBI® or that the products supplied will meet specifications.

In
addition, any prolonged interruption in the operations of Chiron's or its contractors' manufacturing facilities could result in cancellations of shipments. A number of factors
could cause interruptions, including equipment malfunctions or failures, damage to a facility due to natural disasters or suspension of power supplied to these facilities arising out of regional power
shortages. Difficulties or delays in Chiron's or its contractors' manufacturing of existing or new products could increase costs and cause loss of revenue or market share.

Patents Held By Third Parties May Delay or Prevent Commercialization

Third parties, including competitors, have patents and patent applications in the U.S. and other significant markets that may be useful or necessary for the
manufacture, use or sale of certain of the Company's products and products in development. It is likely that third parties will obtain other such patents in the future. Certain of these patents may be
sufficiently broad to prevent or delay Chiron from manufacturing or marketing products important to the Company's current and future business. The scope, validity and enforceability of such patents,
if granted, the extent to which Chiron may wish or need to obtain licenses to such patents, and the cost and availability of such licenses cannot be accurately predicted. If Chiron does not obtain
such licenses, products may be withdrawn from the market or delays could be encountered in market introduction while an attempt is made to design around such patents. Alternatively, Chiron could find
that the development, manufacture or sale of such products is foreclosed. Chiron could also incur substantial costs in licensing or challenging the validity and scope of such patents.

Product Acceptance

The Company may experience difficulties in launching new products, many of which are novel products based on technologies that are unfamiliar to the healthcare
community. There can be no assurance that healthcare providers and patients will accept such products. In addition, government agencies, as well as private organizations involved in healthcare, from
time to time publish guidelines or recommendations to healthcare providers and patients. Such guidelines or recommendations can be very influential and may adversely affect the usage of the Company's
products directly (for example, by recommending a decreased dosage of the Company's product in conjunction with a concomitant therapy) or indirectly (for example, by recommending a competitive product
over the Company's product).

Competition

Chiron operates in a highly competitive environment, and the competition is expected to increase. Competitors include large pharmaceutical, chemical and blood
testing companies, as well as biotechnology companies. Some of these competitors, particularly large pharmaceutical and blood testing companies, have greater resources than the Company. Accordingly,
even if the Company is successful in launching a product, it may find that a competitive product dominates the market for any number of reasons, including the possibility that the competitor may have
launched its product first; the competitor may have greater marketing capabilities; or the competitive product may have therapeutic or other advantages. The technologies applied by the Company and its
competitors are rapidly evolving, and new developments frequently result in price competition and product obsolescence.

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Chiron's Patents May Not Prevent Competition or Generate Revenues

Chiron seeks to obtain patents on its inventions. Without the protection of patents, competitors may be able to use the Company's inventions to manufacture and
market competing products without being required to undertake the lengthy and expensive development efforts made by Chiron and without having to pay royalties or otherwise compensate Chiron for the
use of the invention.

There
can be no assurance that patents and patent applications owned or licensed to Chiron will provide substantial protection. Important legal questions remain to be resolved as to
the extent and scope of available patent protection for biotechnology products and processes in the U.S. and other important markets. It is not known how many of the Company's pending patent
applications will be granted, or the effective coverage of those that are granted. In the U.S. and other important markets, the issuance of a patent is neither conclusive as to its validity nor the
enforceable scope of its claims. The Company has engaged in significant litigation to determine the scope and validity of certain of its patents and expects to continue to do so in the future.

Even
if the Company is successful in obtaining and defending patents, there can be no assurance that these patents will provide substantial protection. The length of time necessary to
resolve patent litigation successfully may allow infringers to gain significant market advantage. Third parties may be able to design around the patents and develop competitive products that do not
use the inventions covered by the patents. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third
parties (for example, the third party's product is needed to meet a threat to public health or safety in that country, or the patent owner has failed to "work" the invention in that country, or the
third party has patented improvements) and most countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may be limited
to monetary relief and may be unable to enjoin infringement, which could materially diminish the value of the patent.

Availability of Reimbursement; Government and Other Pressures on Pricing

In the U.S. and other significant markets, sales of the Company's products may be affected by the availability of reimbursement from the government or other
third parties, such as insurance companies. It is difficult to predict the reimbursement status of newly approved, novel biotechnology products, and current reimbursement policies for existing
products may change. In certain foreign markets, governments have issued regulations relating to the pricing and profitability of pharmaceutical companies. There have been proposals in the U.S. (at
both the federal and state level) to implement such controls. The growth of managed care in the U.S. also has placed pressure on the pricing of healthcare products. These pressures can be expected to
continue.

Costs Associated with Expanding the Business

Management expects to grow the business in areas in which the Company can be most competitive, either through in-licensing, collaborations or
acquisitions of products or companies. In connection with these efforts, the Company may incur significant charges, costs and expenses which could impact the Company's profitability, including
impairment losses, restructuring charges, the write-off of purchased in-process technologies, transaction-related expenses, costs associated with integrating new businesses and
the cost of amortizing goodwill and other intangibles.

Other New Products and Sources of Revenue

Many products in the Company's current pipeline are in relatively early stages of research or development. The Company's ability to grow earnings in the
near- to medium-term may depend, in part, on its ability to initiate and maintain other revenue generating relationships with third parties, such as licenses to certain of the
Company's technologies, and on its ability to identify and successfully acquire

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rights to later-stage products from third parties. There can be no assurance that such other sources of revenue will be established.

Interest Rate and Foreign Currency Exchange Rate Fluctuations

The Company has significant cash balances and short-term investments. The Company's financial results, therefore, are sensitive to interest rate
fluctuations in the U.S. In addition, the Company sells products in many countries throughout the world, and its financial results could be significantly affected by fluctuations in foreign currency
exchange rates or by weak economic conditions in foreign markets.

Corporate Partners

An important part of the Company's business strategy depends upon collaborations with third parties, including research collaborations and joint efforts to
develop and commercialize new products. As circumstances change, the Company and its corporate partners may develop conflicting priorities or other conflicts of interest. The Company may experience
significant delays and incur significant expenses in resolving these conflicts and may not be able to resolve these matters on acceptable terms. Even without conflicts of interest, the parties may
differ in their views as to how best to realize the value associated with a current product or a product in development. In some cases, the corporate partner may have responsibility for formulating
and implementing key strategic or operational plans. In addition, merger and acquisition activity within the biotechnology industry may affect the Company's
corporate partners, causing them to reprioritize their efforts related to the research collaborations and other joint efforts with the Company. Decisions by corporate partners on key clinical,
regulatory, marketing (including pricing), inventory management and other issues may prevent successful commercialization of the product or otherwise impact the Company's profitability.

Stock Price Volatility

The price of the Company's stock, like that of other biotechnology companies, is subject to significant volatility. Any number of events, both internal and
external to the Company, may affect the stock price. These include, without limitation, results of clinical trials conducted by the Company or by its competitors; announcements by the Company or its
competitors regarding product development efforts, including the status of regulatory approval applications; the outcome of legal proceedings, including claims filed by the Company against third
parties to enforce its patents and claims filed by third parties against the Company relating to patents held by the third parties; the launch of competing products; the resolution of (or failure to
resolve) disputes with collaboration partners; corporate restructuring by the Company; licensing activities by the Company; and the acquisition or sale by the Company of products, products in
development or businesses.

In
connection with its research and development collaborations, from time to time the Company invests in equity securities of its corporate partners. The price of these securities
also is subject to significant volatility and may be affected by, among other things, the types of events that affect the Company's stock. Changes in the market price of these securities may impact
the Company's profitability.

Income Taxes

The Company is taxable principally in the U.S., Germany, Italy and The Netherlands. All of these jurisdictions have in the past and may in the future make
changes to their corporate tax rates and other tax laws, which could increase the Company's tax provision in the future. The Company has negotiated a number of rulings regarding income and other taxes
that are subject to periodic review and renewal. If such rulings are not renewed or are substantially modified, taxes payable in particular jurisdictions could increase. While the Company believes
that all material tax liabilities are reflected properly in its balance sheet, the Company is presently under audit in several jurisdictions, and there can be no assurance that the

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Company will prevail in all cases in the event the taxing authorities disagree with the Company's interpretations of the tax law. In addition, the Company has assumed liabilities for all income taxes
incurred prior to the sales of its former subsidiaries, Chiron Vision (subject to certain limitations) and Chiron Diagnostics. Future levels of research and development spending, capital investment
and export sales will impact the Company's entitlement to related tax credits and benefits which have the effect of lowering its effective tax rate.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk managementThe Company's cash flow and earnings are subject to fluctuations due to changes in foreign
currency exchange rates, interest rates and fair value of equity securities held. The Company attempts to limit its exposure to some or all of these market risks through the use of various financial
instruments. There were no significant changes in the Company's market risk exposures as they relate to interest rates, equity securities and counterparties through the first quarter 2001.

In
February and March 2001, the Company purchased put options ("currency options") to hedge anticipated currency exposures related to Euro-denominated revenues. At
March 31, 2001, these exposures amounted to $39.9 million and were offset by currency options with a notional value of $32.6 million (fair value of $1.1 million). Based on
exposures as of March 31, 2001, a 10% adverse movement against the Company's portfolio of anticipated exposures and hedge contracts would result in a loss of approximately $1.6 million.
A 10% movement in the value of the dollar versus the Company's portfolio of anticipated exposures has not occurred in the last 12 quarters. The Company had no currency options outstanding at
December 31, 2000.

For
further discussion of the Company's market risk exposures, refer to Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk" of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.

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PART II

Item 1. Legal Proceedings

The Company is party to certain lawsuits and legal proceedings, which are described in Part I, Item 3., "Legal Proceedings" of the Company's Annual
Report on Form 10-K for the year ended December 31, 2000. The following is a description of material developments during the period covered by this Quarterly Report and
should be read in conjunction with the Annual Report on Form 10-K.

Cystic Fibrosis Pharmacy

In May 2000, PathoGenesis Corporation ("PathoGenesis") initiated an action against Cystic Fibrosis Pharmacy, Inc. ("CF Pharmacy") in the United States District
Court For The Middle District Of Florida, Orlando Division. PathoGenesis asserted that CF Pharmacy's advertising and sale of an inhaled antibiotic infringes PathoGenesis' U.S. Patent No. 5,508,269
(the "'269 patent"). PathoGenesis sought injunctive relief and damages. CF Pharmacy filed a counterclaim seeking a declaratory judgment of invalidity regarding the '269 patent. In September 2000, the
court entered a consent order enjoining CF Pharmacy from advertising, compounding or selling the aerosol formulation alleged to infringe the '269 patent or use any imitation of the TOBI®
trademark until further order of the court. On February 1, 2001, the dispute was settled by agreement of the parties. Among the settlement provisions, CF Pharmacy acknowledged the validity and
enforceability of the '269 patent, agreed not to infringe the '269 patent, and agreed to certain restrictions on future advertising. A Consent Order and Final Judgment setting forth these terms of
settlement was entered by the court on April 11, 2001.

Dade Behring Marburg GmbH and Dade Behring S.p.A.

On January 30, 2001, Dade Behring Marburg GmbH and Dade Behring S.p.A. (collectively, "Dade Behring") filed suit in the Court of Milan against Chiron
regarding Chiron's European Patent No. 0 181 150 (the "'150 patent") relating to HIV technology. Dade Behring seeks a declaration that the Enzygnost® HIV 1/2
plus immunoassay kit does not infringe the Italian and other national counterparts to the '150 patent, and to nullify the Italian portion of the '150 patent. On April 11, 2001, Chiron denied
Dade Behring's allegations and filed a counterclaim seeking a declaration of infringement of the Italian
portion of the '150 patent by the Enzygnost® HIV 1/2 plus kit and related damages. It is not known when nor on what basis this matter will be resolved.

F. Hoffman La-Roche A.G.

Chiron has been involved in certain previously reported litigation in the United States, Italy, Japan, the Netherlands, Belgium, Germany and Australia with F.
Hoffman La-Roche AG and several of its affiliated companies (collectively, "Roche") concerning infringement and/or validity of certain Chiron patents related to HCV and HIV technology. In
October 2000, Chiron and Roche resolved all pending litigation between them regarding HCV and HIV nucleic acid technology. Among the settlement provisions, Chiron granted Roche licenses to
manufacture and sell HCV and HIV nucleic acid clinical diagnostic tests. Chiron also agreed to license Roche for a limited time period to sell HCV and HIV nucleic acid tests for blood screening.

The
above agreement does not resolve the disputes between Chiron and Roche in the field of immunoassay technology for HCV. In connection therewith, Roche initiated two nullity actions
against Chiron's German HCV national patents (the "'104, '524 and '527 patents"), and the European '931 patent in the German Federal Patent Court ("Bundespatentgericht") in December 2000. In
January 2001, the Bundespatentgericht divided the German patent suit into three individual actions.

In
July 2000, Chiron initiated an action against Roche Diagnostics GmbH in the German Federal Court ("Landgericht") in Dusseldorf, asserting that Roche's manufacture and sale
of products regarding

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HCV immunoassay technology infringe Chiron's German Patent Nos. DD 298 527 (the "'527 patent"), DD 298 524 (the "'524 patent"), DD 287 104 (the "'104 patent"), DD 297 446 (the "'446 patent") and
Chiron's European Patent No. EP 0 450 931 (the "'931 patent"). The Landgericht subsequently separated the matter into five individual actions. Oral hearings are currently scheduled for
October 2001.

In
July 2000, Chiron initiated action against Roche Diagnostics GmbH and related foreign entities in the German Administrative Court ("Verwaltungsgericht") in Karlsruhe,
asserting that Roche's manufacture and sale of HCV immunoassay products in various European countries infringe the '931 patent. Over Roche's objections, the action was referred to the District Court
of Mannheim in March 2001.

It
is not known when nor on what basis the remaining matters will be resolved.

Gen-Probe Incorporated

In February 2001, Gen-Probe Incorporated ("Gen-Probe") filed a demand for arbitration alleging Chiron breached certain of the
terms of their June 1998 collaboration agreement regarding nucleic acid tests used for blood screening. Gen-Probe seeks various declarations of the parties' rights under the
agreement and compensatory damages. Chiron has answered the demand denying that it is in breach and asserting certain cross claims against Gen-Probe. It is not known when nor on what basis
this matter will be resolved.

Sorin Biomedica/Snia

In June 1994, Sorin Biomedica S.p.A. ("Sorin") filed a lawsuit with the Court of Milan, Italy against Chiron and Ortho Diagnostic Systems S.p.A. seeking
a declaration of nullity and non-infringement of the Italian counterpart to Chiron's European Patent 0 318 216 (the "'216 patent") claiming HCV immunodiagnostic technology. Chiron denied
Sorin's allegations and filed a counterclaim seeking a declaration of infringement. In February 1997, the Court enjoined Sorin from manufacturing or selling HCV immunoassay kits in Italy. After
Sorin made further objections, the Court ruled in October 1999 that certain '216 patent claims were valid and that Sorin's HCV immunoassay infringed the '216 patent. In June 2000 the
European Patent Office Technical Board Of Appeals upheld the validity of the '216 patent in an amended form which deleted claims that Chiron alleged to have been infringed by Sorin. In
December 2000, Snia S.p.A., Sorin's parent company, filed an appeal in the Court of Milan asking the Court to declare the Italian portion of the '216 patent null and void and to award Snia
damages. On March 14, 2001, Chiron denied Snia's allegations and asked the Court to dismiss the case. It is not known when nor on what basis this matter will be resolved.

Washington Research Foundation

In March 2001, the Washington Research Foundation ("WRF") filed a demand for arbitration with the American Arbitration Association alleging Chiron
breached the terms of a February 1989 license agreement regarding patents claiming recombinant yeast expression production technology jointly held by WRF and Genentech, Inc.
("Genentech"), and that the license agreement is therefore terminated. WRF seeks either a judgment declaring the license agreement terminated and royalty damages accrued up to the alleged termination
date, or in the case that the license agreement is held not to have terminated, royalty damages accrued up to the judgment date. On April 30, 2001, Chiron responded to the arbitration demand,
denying that it is in breach of the license, and Chiron also filed suit against WRF and Genentech in the United States District Court for the Northern District of California seeking to have the
underlying WRF and Genentech U.S. patents declared invalid. It is not known when nor on what basis this matter will be resolved.

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Item 6. Exhibits and Reports on Form 8-K

|Exhibit
Number |  | Exhibit                                                                                                                                                                                                                                                                                   
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.01           |  | Restated Certificate of Incorporation of the Registrant, as filed with the Office of the Secretary of State of Delaware on August 17, 1987, incorporated by reference to Exhibit 3.01 of the Registrant's report on Form 10-K
for fiscal year 1996.                                       
|3.02           |  | Certificate of Amendment of Restated Certificate of Incorporation of the Registrant, as filed with the Office of the Secretary of State of Delaware on December 12, 1991, incorporated by reference to Exhibit 3.02 of the
Registrant's report on Form 10-K for fiscal year 1996.         
|3.03           |  | Certificate of Amendment of Restated Certificate of Incorporation of the Registrant, as filed with the Office of the Secretary of State of Delaware on May 22, 1996, incorporated by reference to Exhibit 3.04 of the
Registrant's report on Form 10-Q for the period ended June 30, 1996.
|3.04           |  | Bylaws of the Registrant, as amended, incorporated by reference to Exhibit 3.04 to the Registrant's report on Form 10-K for fiscal year 2000.                                                                                                                                             
|4.01-4.04      |  | Reserved.                                                                                                                                                                                                                                                                                 
|10.501         |  | Chiron 1991 Stock Option Plan, as amended and restated.*                                                                                                                                                                                                                                  
|10.512         |  | Change-in-Control Severance Plan.*                                                                                                                                                                                                                                                        

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CHIRON CORPORATION
March 31, 2001

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                  |  | CHIRON CORPORATION
|----------------- |  | ------------------
|DATE: May 9, 2001 |  | BY:               
|DATE: May 9, 2001 |  | BY:               
|DATE: May 9, 2001 |  | BY:               

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